US CREDIT-Hovnanian cash declines may threaten bond payments
NEW YORK, March 19 (Reuters) - U.S. homebuilder Hovnanian Enterprises (HOV.N) is expected to burn through its cash at a rapid rate in 2009 as housing markets remain weak, which may put the repayment of a $100 million bond due in January at risk.
Hovnanian last week posted a larger-than-expected first-quarter net loss of $178.4 million and warned that it will be more challenging to generate cash flows going forward.
The builder increased its cash balance during the quarter to $842.6 million at Jan. 31, from $838 million at Oct. 31, but cash would have declined were it not for a federal tax refund of $145.2 million. For details, see [ID:nN10540358]
"In 2009 it will rapidly come to a head," said Vicki Bryan, analyst at independent credit research firm Gimme Credit. "I think they are going to run through a good part of their cash, enough to get their banks worried and perhaps step in and block the bond maturity in January."
Hovnanian's liquidity has been buoyed by bond and stock sales made last year, in addition to tax refunds.
With these one-time gains behind them, however, and housing markets not expected to recover until at least 2010, analysts view Hovnanian as one of the builders most vulnerable to defaulting on its debt.
Fitch Ratings and Moody's Investors Service this month cut their ratings on Hovnanian into the "CCC" tier, a deeply speculative rating, and S&P said it may follow.
"Even though Hovnanian was the second-to-last in the industry to turn cash flow positive on a trailing twelve month basis, it will be among the first in the industry to once again turn cash flow negative, beginning this year, after excluding the contribution from tax loss refunds," Moody's said in a statement.
The cost to insure Hovnanian's debt with credit default swaps has risen to 3640 basis points, or $3.64 million per year to insure $10 million in debt for five years, from the 1500 basis point area last October, according to Markit.
Barclays Capital reiterated its an "underweight" recommendation on Hovnanian's CDS after its earnings, describing the company's cash flow performance in the first quarter as "a significant disappointment."
Hovnanian said it repurchased its bonds at a discount in the secondary market, and indicated the repurchases reflected a solid outlook for its cash balance.
"If we believed that we would run out of cash by 2010, then we would not have recently spent our cash to buy back over $350 million of our debt," Hovnanian Chief Financial Officer Larry Sorsby said in response to an analyst comment.
Barclays analysts, however, said the debt buybacks will further pressure the company's cash flows.
"Post quarter-end, management repurchased a further $240 million of its unsecured notes and $75 million of its subordinated debt for $105 million in cash," the analysts said in a report.
"These transactions will bring its cash balance down to $738 million and will place further pressure on the company to generate operating cash flow during the balance of 2009."
Gimme Credit's Bryan believes Hovnanian could make a net loss of $625 million in fiscal 2009 and that its cash pile could drop to $320 million.
As its interest coverage levels decline, the company's bank lenders could try to block the January payment of the bond in order to maintain minimum liquidity levels required by the debt covenants.
"We expect Hovnanian's banks to intercede before it can deplete its cash, with similar measures that resulted in default and bankruptcy for TOUSA and WCI Communities in 2008," she said.
Analysts at CreditSights, meanwhile, view the company as likely to attempt to buy back the debt at discounted levels or pursue a distressed debt exchange, rather than pay back the bonds at their full value.
"Why pay par when the company could retire them much cheaper - the essence of a coercive debt exchange - under the auspices of high default risk? We believe the company will continue to pursue debt exchanges which would put bondholders and debt ratings at risk," the analysts said in a report.
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