Fitch Affirms KB Home's IDR at 'BB+'; Outlook Remains Negative

Business Wire, June 10, 2008

NEW YORK -- Fitch Ratings has affirmed KB Home's (NYSE:KBH) Issuer Default Rating (IDR) and other outstanding debt ratings as follows:

--IDR 'BB ';

--Senior unsecured 'BB ';

--Unsecured bank credit facility 'BB ';

--Senior subordinated debt 'BB-'.

The Rating Outlook remains Negative.

The Negative Outlook for KB Home reflects the current difficult housing environment and Fitch's expectations that housing activity will be even more challenging than previously anticipated during the balance of calendar 2008 and that new home activity will still be on the decline well into 2009. The anemic economy and impaired mortgage markets are, of course, contributing to the housing shortfall. The Outlook also reflects negative trends in KB Home's operating margins, further deterioration in credit metrics (especially interest coverage and debt/EBITDA ratios) and erosion in tangible net worth from non-cash real estate charges. However, KB Home's liquidity position provides a buffer and supports the current ratings.

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.

The ratings reflect KB Home's execution of its business model. The ratings also take into account the company'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), 70.6% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past two years 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 $1.3 billion and $1.07 billion available under its $1.3 billion unsecured credit facility (net of $229.6 million of letters of credit) as of Feb. 29, 2008. In addition, liquid, primarily pre-sold work-in-process, and finished inventory totaling $2.85 billion provides comfortable coverage for construction debt.

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.