Fitch Revises KB Home's Outlook to Negative; Affirms 'BB+' IDR & Senior Unsecured

Business Wire, August 28, 2007

NEW YORK -- Fitch Ratings has affirmed KB Home's (NYSE:KBH) ratings as follows:

--Issuer Default Rating (IDR) 'BB ';

--Senior unsecured 'BB ';

--Unsecured bank credit facility 'BB ';

--Senior subordinated debt 'BB-'.

Fitch has also revised KB Home's Rating Outlook to Negative from Stable.

The Negative Outlook for KB Home reflects a more challenging outlook for homebuilders during the balance of calendar 2007 (largely due to disruptions and tightening of standards in the mortgage market) and probable future weakening in the housing market in 2008. Fitch has also taken into account the current and expected near-term deterioration in credit metrics which are similar to the trends being experienced by others in the industry and persistent high cancellation rates which add to speculative inventory totals.

Future ratings and Outlooks will be influenced by broad housing market trends as well as company-specific activity, such as land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new order activity, debt levels and free cash flow trends and uses.

With the housing sector in the midst of a meaningful, multi-year downturn, KB Home is focusing on paring down its land position commensurate with the current housing contraction. During this current downturn, most builders, including KB Home, have leveraged the financial flexibility of land options, walking away from over priced and unneeded lots (forfeiting their deposits). There have also been meaningful charges associated with write downs of land values for most public builders. KB Home took a more cautious stance on land purchases as calendar 2006 evolved to the advantage of free cash flow. Fitch expects that free cash flow will be significantly positive in fiscal 2007, benefiting from the sale of its interest in Kaufman & Broad SA and from less land and development spending and, consequently, reduced inventories.

The ratings reflect KB Home's solid, consistent improving profit performance in recent years (until 2006) and the expectation that the company continues to execute its business model. The ratings also take into account KB Home's primary focus on entry-level and first-step trade-up housing (the deepest segments of the market), its conservative building practices, and effective utilization of return on invested capital criteria as a key element of its operating model. In recent years, KB Home has improved its capital structure and increased its geographic diversity and has better positioned itself to withstand a meaningful housing downturn. Fitch also has taken note of KB Home's role as an active consolidator within the industry.

KB Home maintains a three-year supply of lots (based on last 12 months deliveries), 61.9% of which are owned and the balance controlled through options. (The options share of total lots controlled is down sharply in recent quarters as KB Home has written off substantial numbers of options.)

As the housing cycle continues to contract, creditors should benefit from KB Home's solid financial flexibility supported by cash and equivalents of $272 million and $1.19 billion available under its $1.5 billion domestic unsecured credit facility (net of $308 million of letters of credit) as of May 31, 2007. In addition, liquid, primarily pre-sold work-in-process, and finished inventory totaling $3.96 billion provides comfortable coverage for construction debt. In July 2007, KB Home completed the sale of its entire 49% equity interest in its French subsidiary Kaufman & Broad SA for gross proceeds of approximately $800 million. After-tax net cash proceeds are expected to be about $550 million. At the end of July 2007, KB Home completed the redemption of $250 million of its 9 1/2% senior subordinated notes due 2011 and also repaid in full its unsecured $400 million term loan scheduled to mature in 2011.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.