NEW YORK, Jan 11 (IFR) - MDC Holdings surprised the market on Monday when it priced a US$250m 30-year bond offering, the first deal of that maturity from a homebuilder since 2005.
The positive investor reaction to the deal reflected growing optimism that the US housing sector is finally on the rebound.
Still, “it was surprising to see investors taking the risk of tenor in a sector that is known for its cyclicality,” said Vincent Foley, director and senior fixed income research analyst at Barclays.
“There is merit in being optimistic about homebuilders but whether that should translate into taking duration risk is debatable.”
Homebuilders had a strong run through 2012. Shares of the leading companies, including MDC, Toll Brothers, KB Home and PulteGroup, more than doubled in value as home buying demand returned following six years of stagnation.
The companies also posted a significant rise in earnings thanks to a surge in new orders and increased sales of new homes at higher prices.
During the 2012 spring selling season, sales for Barclays’ composite of 10 homebuilders grew 27% year-on-year -- the first year-on-year growth without direct government support since 2005. In absolute terms, the volume of new orders returned to levels last seen in 2008.
In December, new home sales hit their highest level since April 2010.
The positive backdrop helped MDC’s trade although bankers were uncertan whether the economic and housing data would be viewed as sufficiently strong for investors to use it as a reason to buy 30-year bonds.
There was additional drama when the deal was out in the market. Initial thoughts on the coupon for the January 2043s were heard in the 5.75% area, with rumours that about one-third of the trade had been soft circled on reverse inquiry.
Then there was a slight hiccup a few hours after launch.
The deal was announced as Baa3/BB+/BBB- but when Moody’s released its Baa3 rating, it also talked of a revision in its outlook to negative from stable.
That clearly made investors more sensitive on price. In the end, the US$250m deal priced at par at 6.00% for a spread of Treasuries plus 290.9bp.
In terms of pricing comparables, the MDC 5.625% February 2020s were quoted at US$111 bid or a G spread of 250 basis points pre-announcement (and pre-Moody‘s).
Adding spread differentials for the additional tenor, the comparable bond was roughly at 5.63%, which meant MDC paid a new issue premium of 37bp.
Some thought that price a little rich, but bankers said considering the duration it achieved with the deal, the company was clever with its funding approach.
“Being split-rated between high grade and high yield helped MDC,” said Paul Appleby, head of high yield at Prudential Fixed Income.
“High-yield investors do not buy 30-year bonds but compared to other bonds issued in high grade, the MDC 2043s at 6% are still cheap. There is also a hunt among investors for credits with a growth story and homebuilders fall into that space.”
Looking at its rivals, Toll Brothers, which is also split-rated at Ba1/BB+/BBB-, saw its 5.875% February 2022s quoted with a G spread of 240bp. Adding the 10-year to a 30-year differential, fair value looked to be between 5.20%-5.30%.
The last homebuilder to issue a 30-year bond was Pulte Homes back in 2005.
Banks said other homebuilders are now looking at 30-year issuance and that other long-dated bonds can be expected from the sector.
Last year about 15% of the US$960bn issued in the overall high-grade market were 30-year bonds.
“There is more demand at that part of the curve from pension funds which are overflowing with liquidity as companies replenish their underfunded pension plans,” said Steve Kellner, head of corporates at Prudential Fixed Income.
“The MDC deal should encourage other issuers to look long and hard at the prospect of issuing 30-year bonds.”
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