KB Home's Proposed Senior Unsecured Notes Rated 'BB-' (Recovery Rating: '3')


CENTENNIAL (S&P Global Ratings) Feb. 5, 2019--S&P Global Ratings today 
assigned its 'BB-' issue-level rating and '3' recovery rating to KB Home's 
proposed $300 million senior unsecured notes due in 2027. The '3' recovery 
rating indicates our expectation of meaningful (50%-70%; rounded estimate: 
65%) recovery in the event of payment default. 

This proposed new issuance will be used to repay $400 million senior unsecured 
notes due in May 2019. In addition, the company proposed $100 million in 
borrowings that it plans to add on to its existing senior notes due in 2023. 
This supplemental tranche and cash on hand will be used to pay off its $230 
million in convertible notes that matured on Feb. 1, 2019.

RECOVERY ANALYSIS

Key Analytical Factors
  • We estimate a gross recovery value of about $2.15 billion, which assumes a blended 53% realization rate to book value of inventory and cash also discounted.
  • Although we have estimated substantial recovery prospects for KB Home's senior noteholders, we cap the recovery rating on the senior notes at '3' because we generally limit recovery ratings on unsecured debt issued by corporate entities with issuer credit ratings of 'BB-' or higher.
  • Unsecured debt issued by these entities is generally rated no higher than '3' to account for the risk that their recovery prospects are at greater risk of being impaired by the issuance of additional secured or pari passu debt before default.
Simulated Default Assumptions
  • Our simulated default scenario assumes that a gradual slowdown in U.S. economic growth would deteriorate further to a recessionary environment beginning in 2021 and will cause the housing market to decline. We assume the company's home sale volume and average price would drop substantially toward 2010-2011 levels.
  • In this environment, we expect the rapid decline in EBITDA and increased reliance on revolving debt would prevent the company from meeting its interest coverage requirement in early 2022 and would trigger a default.
  • In our default scenario, we assumed aggregate borrowings of about $392 million under the revolver facility, representing 85% usage of the $500 million commitment (unrated), less outstanding letters of credit.
Simplified Waterfall
  • Gross recovery value: $2.15 billion
  • Administrative and property expenses: $107 million
  • Net recovery value: $2.04 billion
  • Priority claims: $11 million
  • Collateral available to unsecured creditors: $2.03 billion
  • Total unsecured claims: $2.78 billion
  • Recovery expectations: 50%-70% (rounded estimate: 65%)
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