Kimball Hill Homes in Rolling Meadows, Ill., announced earlier this week in an SEC filing that it will be unable to file its 10-K on time for the fiscal year ending September 30, 2007. The builder also said that it's not in compliance with one or more of the covenants of its senior credit facility.

Kimball Hill specifically mentioned that it could be in violation of the covenant requiring it to maintain a minimum tangible net worth. "We have begun discussions with our bank group regarding amending our senior credit facility," the company said in the form notifying the SEC of its late 10-K filing. "The bank group has not provided formal assurance that we will be able to amend our senior credit facility upon reasonable terms, or at all. Nonetheless, there has been no indication that they intend to accelerate amounts due under our facility, and discussions with our lenders regarding an amendment are active and ongoing."

The underlying cause of Kimball Hill's delayed filing and its covenant breach is the housing market, which it says is continuing to deteriorate. For the nine months ending June 30, 2007, the company reported a net loss of $75.1 million. It reported net earnings $38.5 million for the nine months ending June 30, 2006. It reported $133.7 million in impairment charges for the nine month period ending June 30, 2007 and expects more impairments for the fiscal year 2007, which is adding to its difficulty in filing.

"Market conditions for new home sales have continued to deteriorate significantly throughout our fiscal year," Kimball Hill said in the SEC filing. "Inventory levels of both new and existing homes have continued to climb and aggressive price competition has continued to put pressure on already strained profit margins. Significant home price appreciation in prior periods combined with fluctuating interest rates and tightening credit standards in the mortgage industry are all negatively affecting affordability and consumer sentiment for housing."

An unscheduled medical leave of absence from CFO Ed Madell, which shifted his responsibilities to other Kimball Hill employees, also delayed the filing. The company expects to file no later than January 15, 2008.

In response to the announcement, Standard & Poor's Ratings Services lowered its corporate credit rating of Kimball Hill Inc. to "CCC+" from "B" and lowered the rating on the company's senior subordinated notes to "CCC-" from "CCC+." At the same time, it placed all of the ratings on CreditWatch with negative implications. The rating actions affect $203 million in rated senior subordinated notes.

Due to the covenant violations, Kimball Hill won't have access to additional borrowed funds under its $500 million senior credit facility. That limited liquidity troubles Lisa Wright, an associate director for Standard & Poor's.

"Right now, they don't have access to their revolving credit facility," Wright said. "They're in negotiations with the banks on that. Clearly, if they can't reach an agreement, they would face difficulties."