******************** DAIWA NEW ISSUE COLOR: KBH **************** $150m (+17.5m) sen unsec cb coming tonite from CITI/CS/MER/DB.
Terms: 6y, 1⅜-1⅞% up 45-50%, NC 5.75yrs, full pctns. Concrnt $100m (+15m) stk plcmnt.UOP=gcp.TOL & MTH came 09/12. TOL ½% up 50% (better credit) & MTH 1⅞% up 47½% (good comp w/CITI lead left as well).Stk +158% from 06/12 low w/5y CDS ~390 & 7y ~450.
We’d use L+415 for 6y. ADV=6m, 01/15 60d calls ~38-43, w/out CDS how well does 1⅝ up 47½% on a $1.4bn home builder hold on way down? We’ll use 35%. Theo=97½/99½/101½.Like MTH, a model trap unless u set up vs CDS. Right $px (only MTH/TOL ~par) & will do ok whilst mkt believes in housing recovery (MTH +4pt o/swap from 09/12). We DO NOT want to be long w/out CDS if/when music stops Optic rich/model fair. AVOID unless CHEAP (bbg/co filing
KBH New Issue Color- Buy it for a flip
The optics of the bond aren’t great. Low coupon and high premium but that’s what we’ve come to expect in the homebuilder space.
The bond doesn’t model that cheaply either. Around 35.5 on the mids puts it right in line with SPF and more expensive than TOL, RYL and LEN.
Arguably KBH is a more volatile stock, (more like SPF), but with credit roughly double the other homebuilders, this is less likely than others to hold in a downturn (if it comes). Also homebuilder vol is currently declining and some of the other names are under pressure. And vol names in general are under pressure.
All that being said, homebuilders bonds have done well on issue and given the small deal size, we suspect that this won’t be an exception. But it’s not an attractive long-term hold.