5 High-Yield Housing Bonds To Consider Now

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Includes: KBH, LEN, MAS, MTG, PHM
by: The Financial Lexicon

Whether or not the housing market has bottomed is certainly up for debate. But let’s not forget that financial markets often price in known unknowns before the worst is over. As it relates to housing, known unknowns refer to the fact that we all know the housing market is in terrible shape, and while many people expect it to get worse, it is unknown how much worse it will get. However, since many investors expect it to get worse, a lot of bad news might already be priced into the debt and equity of companies related to the housing market.

If you believe the worst is priced in but are nervous taking the leap into the common stock of housing-related companies, another option is to go up the capital structure and buy unsubordinated (Senior) bonds. While the liquidity for many housing related corporate bonds will not be anywhere near the levels of liquidity for the stocks, by moving up the capital structure, you will be taking less risk while still gaining exposure to the housing industry.

Here are five high-yield housing-related bonds worth examining:

Pulte Group (NYSE:PHM) describes itself on its website as “one of the nation’s largest and most diversified homebuilders,” having built more than 500,000 homes. Its Senior company guaranteed note (CUSIP: 745867AP6) maturing 5/15/2033 has a coupon of 6.375% and is currently asking 73.00 cents on the dollar (9.30% yield-to-maturity before commissions). It has a make whole call, conditional puts for a change of control, and pays interest semi-annually. Moody’s currently rates the bond at B1, S&P at BB- (non-investment grade ratings). This bond is highly illiquid and has traded in a range of 67.186 to 72.25 since October 11, 2011. Currently, there are no bids for this bond.

Lennar Corp. (NYSE:LEN) describes itself on its website as “one of the nation’s leading builders of quality homes for all generations,” catering “to almost any lifestyle.” Its Senior company guaranteed note (CUSIP: 526057BD5) maturing 6/1/2018 has a coupon of 6.95% and is currently asking 101.75 cents on the dollar (6.615% yield-to-maturity before commissions). It has a make whole call, conditional puts for a change of control, and pays interest semi-annually. Moody’s currently rates the bond at B3, S&P at B+ (non-investment grade ratings). This bond is highly illiquid and has traded in a range of 96.125 to 103.10 since October 26, 2011. The bond is currently bidding 97.50 (7.438% yield-to-maturity before commissions). The bid/ask spread of 4.25 cents on the dollar is wide enough that depending on your relationship with your broker, and how much you are willing to allocate to the bond, you might be able to secure a better asking price.

KB Home (NYSE:KBH) describes itself on its website as “one of the nation’s premier homebuilders,” having delivered “over half a million quality homes for families since its founding in 1957.” Its Senior company guaranteed note (CUSIP: 48666KAM1) maturing 6/15/2015 has a coupon of 6.25% and is currently asking 90.00 cents on the dollar (9.611% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody’s currently rates the bond at B2, S&P at B+ (non-investment grade ratings). This bond has traded in a range of 83.50 to 92.00 since October 25, 2011. The bond is currently bidding 89.00 (9.972% yield-to-maturity before commissions).

In addition to the home builders, here are two derivative housing plays:

Masco Corp. (NYSE:MAS) describes itself on its website as “one of the world’s largest manufacturers of brand-name products for the home improvement and new home construction markets.” Among other things, its products include faucets, cabinets, bath and shower units, plumbing specialties, and decorative hardware. Masco’s Senior unsecured note (CUSIP: 574599AT3) maturing 8/1/2029 has a coupon of 7.75% and is asking 97.875 cents on the dollar (7.974% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the bond at Ba2 (non-investment grade rating), S&P at BBB-. This bond has traded in a range of 96.65 to 101.09 since October 28, 2011. The bond is currently bidding 97.00 (8.069% yield-to-maturity before commissions).

And for those who like to piggyback into the companies in which well-known hedge fund managers are investing, I present to you MGIC Investment Corp and the lowest rated bond on this list. Kyle Bass of Hayman Capital Management L.P., known for predicting and correctly betting on the collapse of the housing market, recently purchased a 4.9% equity stake in MGIC. If you would like to be further up the capital structure than Mr. Bass, here is one option:

MGIC Investment Corp. (NYSE:MTG) describes itself on its website as “the founder and leader of the private mortgage insurance industry, serving more than 3,300 lenders with locations across the country and Puerto Rico.” Its Senior unsecured note (CUSIP: 552848AA1) maturing 11/1/2015 has a coupon of 5.375% and is asking 71.00 cents on the dollar (15.428% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody’s currently rates the bond at B3, S&P at CCC+ (non-investment grade ratings). This bond has traded in a range of 64.070 to 71.50 since October 28, 2011. The bond is currently bidding 67.00 (17.202% yield-to-maturity before commissions).

If you are interested in purchasing any of these securities, but are nervous about current economic conditions wreaking havoc on your portfolio over the coming months, learn how to hedge individual bonds here.

Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. The current prices may also differ greatly from those listed at the time this article was written.

Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.