Fitch Assigns 'BB-' Rtg to KB Home's $250MM Debt Issue

Business Wire, Jan 21, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 21, 2003

Fitch Ratings has assigned a 'BB-' rating to KB Home's (NYSE:KBH) $250 million, 7.75% senior subordinated notes due February 1, 2010. The 'BB ' senior unsecured debt rating is affirmed. The Rating Outlook is Stable. Proceeds from the new debt issue would replace the $125 million principle amount of 9 5/8% senior subordinated notes due 2006. There is a call premium of 3.2125% (approximately $4 million) for the 9 5/8% notes. The balance of the proceeds will be used for other corporate purposes. The new issue has a lower rate and extends the maturity by roughly three years. For the fiscal year ending November 30, 2003, Fitch expects leverage (excluding financial services) to remain comfortably within KB Home's stated debt to capital target of 45-55%.

The long-term ratings for KB Home are based on the company's geographic diversity, primary focus on the entry-level homebuyer, solid operating performance, conservative building practices and effective utilization of return on invested capital criteria as a key element of its operating model. Risk factors include the inherent cyclical nature of the homebuilding industry.

The company has expanded EBITDA margins over the past several years on steady price increases, volume improvements and reductions in SG&A expenses. Also, KB Home has produced record levels of home closings, orders and backlog as the housing cycle extended its upward momentum. KB Home realizes a significant portion of its revenue from California, a region that has proved volatile in past cycles. But the company has reduced this exposure as it has implemented its growth strategy and currently sources 23% of its deliveries from California, compared with 69% in fiscal 1995. Over recent years KB Home shifted toward a presale strategy, producing a higher backlog/delivery ratio and reducing the risk of excess inventory and debt accumulation in the event of a slowdown in new orders. The strategy has also served to enhance margins. The company maintains a 4 year supply of lots (based on deliveries projected for 2003), 50% of which are owned and the balance controlled through options. Inventory turnover has been consistently at or above 1.8 times (x) during the past six years.

Balance sheet liquidity has continued to improve as a result of efforts to reduce long-dated inventories, quicken inventory turns and improve returns on capital. Progress in these areas has allowed the company to accelerate deliveries without excessively burdening the balance sheet.