KB Home Outlook Revised To Positive On Steadily Improving Cash Flows And Declining Debt Levels; 'BB-' Ratings Affirmed

  • U.S.-based homebuilder KB Home continues to generate solid EBITDA. Despite recently slowing revenue growth, the company is maintaining improved margins, while keeping its commitment to further reduce debt.
  • On Jan. 29, 2019, S&P Global Ratings revised its outlook on KB Home to positive from stable and affirmed the 'BB-' issuer credit rating and issue-level rating on the company's senior unsecured notes. The recovery rating on the notes remains '3'.
  • The positive outlook reflects our expectation that key financial measures should continue to improve at KB Home, though at a slower pace, as the company marks cycle highs for most metrics and faces slackening broader demand trends.
CENTENNIAL (S&P Global Ratings) Jan. 29, 2019--S&P Global Ratings today took 
the rating actions listed above. The outlook revision primarily reflects 
strongly improved financial metrics, but which now appear to be moderating 
from these relatively firm levels. Even though we anticipate that further 
revenue increases and margin gains will be harder won, due to slowing broader 
demand and affordability issues, there remains ample scope for continued 
improvement in KB's credit profile. We think management is committed to using 
its solid discretionary cash flows toward continued debt reduction, and we 
would expect to raise our rating on KB Home to 'BB' if the company is able to 
maintain leverage around 3x or below. In achieving debt to EBITDA of 3.1x at 
the end of fiscal 2018, the company has nearly halved its leverage in just two 
years, and has brought debt to capital firmly below 50%.

Our positive rating outlook reflects KB Home's volume-based revenue 
improvements in 2019 that we expect to generate about $600 million in EBITDA, 
despite slower overall demand. This mostly steady EBITDA and slower 
anticipated land-inventory expansion, should result in free operating cash 
flows (FOCF) above $200 million, which we think KB Home will employ mainly for 
continuing debt reduction.
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