Fitch Ratings on Tuesday affirmed its ratings for KB Home (NYSE: KBH), including the company's Issuer Default Rating (IDR) at 'BB-', three levels below investment grade. The Rating Outlook, however, was revised to 'Negative' from 'Stable.'

Fitch said drop in outlook for KB "reflects the company's underperformance relative to its peers in certain operational categories during recent quarters in an admittedly harsh housing environment, its current over-exposure to the credit challenged entry level market, and the upcoming cash flow pressures resulting from the on-going problems of the South Edge LLC bankruptcy."

KB took a $22.8 million charge related to South Edge during the first quarter. Fitch said it estimates KB still has $137 million, minus an anticipated arbitration award, in liability related to South Edge, the joint venture at the struggling Inspirada community in Henderson, Nevada that was forced into involuntary bankruptcy by lenders earlier this year.

In its announcement of the ratings action, Fitch stated, "KBH's most recent credit metrics, while improving in certain cases, remain stressed. Debt to capitalization was 76.8% as of Feb. 28, 2011, up slightly from 73.8% a year ago. Net debt to capitalization was 65.2%, up from 58.0% as of Feb. 28, 2010. Debt to EBITDA, excluding real estate impairments, was 14.9 times (x) and was 18.6x at the end of the 2010 first quarter. "