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Rating Action:

Moody's assigns B1 ratings to KB Home's proposed senior unsecured notes

05 Feb 2019

Approximately $400-450 million of debt securities rated

New York, February 05, 2019 -- Moody's Investors Service ("Moody's") assigned B1 ratings to KB Home's proposed $300 million of senior unsecured notes due 2027 and to its proposed $100 million add-on to existing 7.625% senior unsecured notes due 2023. All other ratings for the company remain unchanged. The outlook is positive.

The proposed notes are being issued to address the upcoming maturity of KB Home's $400 million 4.75% senior unsecured notes due in May 2019. Meanwhile, the company used cash on hand to retire $230 million of its 1.375% convertible senior notes upon their expiration on February 1, 2019. These transactions are credit positive given the resulting reduction in leverage as Moody's-adjusted debt to book capitalization declines to 48% from 50% at November 30, 2018, while homebuilding interest coverage improves modestly. We anticipate the company to continue to make progress in deleveraging its capital structure and strengthening its key metrics throughout the year, as it builds scale. However, the recent softening in the US homebuilding industry, as reflected in declining new orders and reduced pricing power given the affordability challenges, particularly in California where KB Home has a significant presence, is a concern.

RATINGS RATIONALE

KB Home's (B1 CFR, positive outlook) credit profile is supported by: 1) a more conservative financial policy focused on improving the balance sheet and our expectation for continued deleveraging over the next 12 to 18 months through earnings retention and debt reduction; 2) KB Home's large scale with revenues of $4.5 billion and home deliveries of 11,317 for its fiscal 2018 ending November 30, making it the seventh largest homebuilder in the US; 3) the company's $2.1 billion equity balance; 4) approximately half of KB Homes' sales generated by the first-time home buyer segment, and our expectation that the company will benefit from the demand of the millennial population anticipated to enter the housing market over the next several years; and 5) Moody's stable outlook for the homebuilding industry reflecting the expectations that underlying fundamentals will remain healthy in 2019.

At the same time, the company's credit profile is constrained by: 1) KB Home's concentration in California, from where it derives nearly half of its total revenues and close to one third of deliveries; 2) recent deceleration in new order bookings; 3) KB Home's supply of inactive land of 7% of total inventory as of November 30, 2018, which tends to generate below company average gross margins, although we acknowledge that KB Home continues to make strides in reducing its inactive land position; 4) risks of shareholder-friendly actions, although we would expect them to be modest.

Ratings assigned:

Issuer: KB Home

Proposed $300 million senior unsecured notes due 2027, assigned B1 (LGD4)

Proposed $100 million add-on to 7.625% senior unsecured notes due 2023, assigned B1 (LGD4)

The positive rating outlook reflects the trajectory of KB Home's improving financial strength and operating performance and our expectations for continued deleveraging.

The Speculative Grade Liquidity Rating of SGL-2 reflects KB Home's good liquidity profile, supported by its sizeable cash position of nearly $400 million pro forma for the repayment of convertible notes, Moody's expectations of positive cash flow generation, nearly full availability under the company's $500 million unsecured revolving credit facility expiring in July 2021, and comfortable cushion under financial covenants.

The ratings could be upgraded if KB Home reduces its homebuilding debt to book capitalization below 45% and increases homebuilding EBIT coverage of interest beyond 4.0x, while continuing to improve its gross margins. An upgrade would also consider maintenance of a good liquidity profile and continued tailwinds in the homebuilding industry.

The ratings could be downgraded if the company's homebuilding debt to book capitalization increases above 55%, homebuilding EBIT coverage of interest falls below 2.0x, gross margins deteriorate significantly, and liquidity profile weakens.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Los Angeles, KB Home is one of the country's largest homebuilders, with a presence in 38 markets and four geographic regions, including the West, Southwest, Central, and Southeast. The company builds attached and detached single-family residential homes, townhomes and condominiums for first-time, first move-up and active adult homebuyers. In the LTM period ending November 30, 2018, KB Home's total revenues and consolidated net income were $4.5 billion and $170 million, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natalia Gluschuk
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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