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I AGREE
31 Jan 2011
Approximately $1.7 billion of debt securities affected
New York, January 31, 2011 -- Moody's Investors Service assigned a Caa2 rating to Hovnanian Enterprises'
proposed $150 million senior unsecured note offering due 2015,
proceeds of which will be used to retire a like amount of existing senior
unsecured and senior subordinated notes. At the same time,
Moody's affirmed the company's Caa1 corporate family and probability of
default ratings, B1 rating on the first lien senior secured notes,
Caa1 rating on the second and third lien senior secured notes, Caa2
rating on the senior unsecured notes, Ca rating on the preferred
stock, and SGL-3 speculative grade liquidity rating.
The Caa3 rating on the existing senior subordinated notes will be withdrawn
upon repayment with the proceeds of this offering. The outlook
remains negative.
Along with the issuance of the new senior unsecured notes, Hovnanian
is planning to sell approximately $50 million in common stock and
$75 million in tangible equity units. In our view,
these transactions enhance the company's liquidity by extending
its debt maturities and increasing its cash position, as well as
strengthen its balance sheet with the equity infusion. As a result,
pro forma adjusted debt leverage improves to 124% from 132%
at October 31, 2010.
RATINGS RATIONALE
The Caa1 corporate family rating reflects Moody's expectation that Hovnanian's
cash flow generation, which became negative in fiscal 2009 and turned
positive but remained weak in fiscal 2010, will be followed by another
year of cash burn in fiscal 2011, as the company ramps up its lot
purchases without any significant offset from earnings. In addition,
the ratings consider the negative net worth position, which Moody's
anticipates will be further reduced by continuing operating losses and
impairment charges. As a result, adjusted debt leverage,
already greatly elevated at an estimated pro-forma 124%,
is likely to climb even further. Finally, Moody's is projecting
that the company will continue generating quarterly operating losses well
into fiscal 2011.
At the same time, the ratings are supported by the company's satisfactory
albeit weakening unrestricted current cash position of about $359
million at October 31, 2010, the equity infusion, the
lack of any financial maintenance covenants going forward, and absence
of any material near-term debt maturities until 2014.
The negative rating outlook reflects risks that the housing recovery that
underpins Hovnanian's current operating strategy may occur after the company's
shrinking cash position, lack of a revolver, and bloated capital
structure place it in an unsustainable financial situation.
The following rating actions were taken:
Caa2 (LGD5, 78%), assigned to the proposed new $150
million senior unsecured notes due 2015;
Caa1 corporate family rating affirmed;
Caa1 probability of default rating affirmed;
First lien senior secured notes due October 15, 2016, affirmed
at B1 (LGD2, 24%);
Second lien senior secured notes due May 1, 2013, affirmed
at Caa1 (LGD4, 52%);
Third lien senior secured notes due May 1, 2017, affirmed
at Caa1 (LGD4, 52%);
Senior unsecured notes, affirmed at Caa2 (LGD5, 78%);
Preferred stock rating, affirmed at Ca (LGD6, 98%);
The Caa3 (LGD6, 95%) rating on the senior subordinated notes
will be withdrawn upon repayment with proceeds from the proposed new debt
financing; and
Speculative grade liquidity assessment, affirmed SGL-3.
All of K. Hovnanian Enterprises' debt is guaranteed by its
parent company, Hovnanian Enterprises, Inc. and its
restricted operating subsidiaries.
The ratings could be lowered if the company were to materially deplete
its cash reserves either through sharper-than-expected operating
losses or through a sizable investment or other transaction.
The outlook could stabilize if the company were to generate sizable amounts
of operating cash flow, turn profitable on an operating basis,
or receive a significant additional infusion of equity capital.
The principal methodologies used in this rating were Global Homebuilding
Industry published in March 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Established in 1959 and headquartered in Red Bank, New Jersey,
Hovnanian Enterprises, Inc. ("Hovnanian") designs,
constructs and markets single-family detached homes and attached
condominium apartments and townhouses. Revenue and consolidated
net income for its fiscal year ending October 31, 2010 were approximately
$1.4 billion and $3 million, respectively.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Joseph A. Snider
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's rates Hovnanian's senior unsecured notes Caa2; outlook negative
No Related Data.
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