Standard & Poor's Ratings Services announced that it has lowered the credit rating of Rolling Meadows, Ill.-based home builder Kimball Hill.

The debt rating agency dropped Kimball Hill's corporate credit rating from B+ to B and its rating on senior subordinated notes from B- to CCC+. The changes affect $203 million in rated debt that matures in 2012. S&P maintains a negative outlook for the builder, primarily because of its exposure to markets in Florida and on the West Coast, including California and Las Vegas. Its three biggest markets are Houston (907 closings), Chicago (521 closings), and Sacramento (492 closings), according to Hanley Wood Market Intelligence.

Kimball Hill's markets only play one part in the company's negative outlook, however; its margins are also problematic. The company delivered 3,669 homes in over 80 active communities and generated $980 million in homebuilding revenues for the 12 months ended June 30, 2007.

"Some of it is the market, and some of it is just the slim profitability that they've experienced," said Beth Campbell, a director for S&P. "That gives them a little less room than some other builders to move price, cut inventory, and still maintain some profitability. They're increasingly vulnerable to these housing market conditions."

S&P expects Kimball Hill to face continued inventory impairments, lot option write-downs and the need to implement pricing incentives. The rating agency reported that the builder already had above-average aggregate impairment charges relative to its rated peer group, which has eroded its equity base.

S&P expects the builder's value leverage (64% as of June 30, 2007) to rise. Its relatively small backlog ($245 million as of June 30) will also limit earnings, and the company needs $30 million to fund the takedown of lots according to its existing off-balance-sheet joint venture obligations.

"We do anticipate that they will be highly reliant on external capital sources," Campbell said. "That's was another driver to both the rating change and the negative outlook."

Kimball Hill has addressed its financial situation by amending covenants for its $500 million senior unsecured revolving credit facility. On June 30, 2007, the company had just over $100 million available under its $500 million unsecured borrowing base credit facility that matures Dec. 31, 2009, according to S&P.

The ratings agency said it will lower its ratings further if Kimball Hill's operating results and liquidity continue to weaken. A representative from Kimball Hill's management team was not available to comment on its ratings change.