Moody's may downgrade KB Home

Moody's Investors Service said it placed all of KB Home's ratings under review for possible downgrade, including its Ba1 corporate family and senior notes rating and Ba2 senior subordinated debt rating, following the company's announcement that it would have to restate its 10-K report for fiscal 2005 and its 10-Q reports for the first two quarters of fiscal 2006. This restatement, plus the late filing of the company's 10-Q report for the third quarter of fiscal 2006, will probably not be completed before Dec. 31, assuming that the Securities and Exchange Commission does not require additional periods to be restated.

The company stated in its original 10-K for fiscal 2005 that it concluded that internal controls over financial reporting were effective as of Nov. 30, 2005. However, due to the recent investigation surrounding option backdating, Moody's said it believes that a material weakness existed pertaining to the company's option granting practices and the agency expects this internal control weakness to be disclosed in the restated 10-K for fiscal 2005. The agency said it also believes that KB Home's management and board will sufficiently address this weakness going forward.

The company has received consent from its senior noteholders to amend the indentures and to waive default until Feb. 23 for failure to file its 10-Q report for the fiscal third quarter in a timely fashion and formal approval from its banking group for the same grace period occurred this week.

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