Fitch Ratings has assigned a 'BB-/RR1' rating on Hovnanian Enterprises,
Inc.'s (NYSE: HOV) $600 million 11.5% senior secured notes due 2013. In
addition, Fitch affirms the following ratings for HOV:
--Issuer Default Rating (IDR) at 'B-';
--Senior secured revolving credit facility at 'BB-/RR1';
--Senior unsecured notes at 'B-/RR4';
--Senior subordinated notes at 'CCC/RR6';
--Series A perpetual preferred stock at 'CCC-/RR6'.
HOV's Rating Outlook is Negative.
Fitch's Recovery Rating (RR) of '1' on HOV's secured revolving credit
facility and senior secured second-lien notes indicates outstanding
(90%-100%) recovery prospects for holders of these debt issues. The
'RR4' on HOV's senior unsecured notes indicates average (30%-50%)
recovery prospects for holders of these debt issues. HOV's exposure to
claims made pursuant to performance bonds and the possibility that part
of these contingent liabilities would have a claim against the company's
assets were considered in determining the recovery for the unsecured
debt holders. The 'RR6' on HOV's senior subordinated notes and preferred
stock indicates poor recovery prospects (0%-10%) in a default scenario.
Fitch applied a liquidation value analysis for these RRs.
HOV issued an aggregate principal amount of $600 million of 5-year
senior secured notes in a private placement. The company also entered
into an amendment to its revolving credit facility which lowers the
total commitments from $900 million to $300 million, increases the
amount of the collateral, and substantially eliminates all but one of
the maintenance covenants. The notes are secured on a second-priority
basis on substantially all the assets owned by the company and
guarantors of the notes to the extent such assets secure obligations
under the company's new revolving credit facility. The company intends
to use the net proceeds from the offering of the notes to repay amounts
outstanding under its existing revolver ($325 million outstanding as of
1/31/08) and for general corporate purposes.
In addition to the new debt offering, the company also recently
completed the issuance of 14 million shares at a price of $9.50 per
share and net proceeds of $126 million. The company has granted the
underwriters an option to purchase up to an additional 2.1 million
shares within a 30-day period to cover over-allotments, if any. The
combination of the debt and equity issuance, together with the strong
cash flow expected for the second half of the year, should provide the
company with sufficient liquidity to fund working capital needs without
reliance on the revolving credit facility. While the company's total
debt position increases by approximately $275 million, HOV is able to
term out the outstandings under the revolver and will have substantial
cash on hand and a less restrictive covenant structure which enhances
the company's liquidity position.
The ratings and Outlook reflect the difficult U.S. housing environment,
current and expected negative trends in HOV's operating margins and
meaningful deterioration in credit metrics, especially interest
coverage, debt/EBITDA ratios and tangible net worth. HOV was slower than
most in braking its growth. Consequently the inventories, although now
starting to come down, are still above comfort levels and debt leverage
remains above the company's targeted levels. While cash flow from
operations only totaled $62 million for all of its fiscal 2007, HOV
generated $357 million of cash from operations during its fourth
quarter, allowing the company to pay down debt by $390 million from the
third-quarter of 2007. HOV generated about $16 million of cash from
operations during its fiscal 2008 first quarter and projects that it
will generate in excess of $300 million of cash flow in 2008.
HOV has been successful in reducing speculative built homes during its
fiscal 2008 first quarter, reducing the total by about 20.6% versus
fourth-quarter 2007 and down 42.4% compared to the peak (third-quarter
2006). This represents about 4.7 started and unsold homes per community.
It is likely that finished spec homes would be priced aggressively in
order to move the inventory, to the disadvantage of margins.
Future ratings and Outlook will be influenced by the economy and broad
housing market trends as well as company-specific activity, such as land
and development spending, general inventory levels, speculative
inventory activity (including the impact of high cancellation rates on
such activity), gross and net new-order activity, debt levels and free
cash flow trends and uses. The possibility of the housing downturn
continuing longer and becoming deeper than currently anticipated could
have broad ratings implications for homebuilders.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
this site.
