Moody's confirms KB Home

Moody's Investors Service said it confirmed KB Home's Ba1 corporate family and probability-of-default ratings, Ba1 (LGD3, 49%) senior notes and Ba2 (LGD6, 92%) subordinated notes.

This concludes the review for downgrade begun on Dec. 15, and the outlook is negative.

The negative outlook reflects Moody's expectation that the company's earnings-based metrics - including interest coverage, return on assets and gross margins - will weaken in fiscal 2007 as the housing correction continues. Additionally, the headroom under the company's 2x interest coverage covenant is projected to narrow significantly in fiscal 2007.

The agency said the ratings incorporate KB Home's positive cash flow generation for the trailing 12 months ended Feb. 28, the company's leading market share position in numerous markets that it serves and its long history through various housing industry cycles.

At the same time, the ratings are constrained by the company's historically large share repurchase program and currently high debt leverage of 51.5%, Moody's said, although the agency expects debt leverage to decline below 50% by the end of fiscal 2007).

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