Dec 7 - Fitch Ratings has affirmed the ratings for Hovnanian Enterprises,
Inc. (NYSE: HOV), including the company's Issuer Default
Rating (IDR), at 'CCC'. A complete list of rating actions follows this release.
The rating for HOV is influenced by the company's execution of its business
model, land policies, and geographic, price point and product line diversity.
The rating additionally reflects the company's liquidity position, substantial
debt and high leverage.
Fitch's housing forecasts for 2012 have been raised a few times this year but
still assume a below-trendline cyclical rise off a very low bottom. In a
slow-growth economy with somewhat diminished distressed home sales competition,
less competitive rental cost alternatives, and new and existing home inventories
at historically low levels, total housing starts should improve 27.6%, while new
home sales increase 19.9% and existing home sales grow 9%. For 2013, total
housing starts should grow 16.7% while new home sales advance 22% and existing
home sales improve 7%.
The company ended the July 2012 quarter with $219.3 million of unrestricted cash
on the balance sheet and no major debt maturities until calendar 2014, when
approximately $37 million of senior notes become due.
While the company currently has an adequate liquidity position, Fitch is
somewhat concerned that the company is willing to operate with a cash target
level of between $170 million and $245 million (including $48.1 million of
restricted cash) to take advantage of land acquisition opportunities. Given that
the company does not have a revolving credit facility, Fitch is concerned that
this level of cash does not provide a large enough liquidity cushion in the
event that the housing recovery dissipates. The absence of a bank credit
facility also means a lack of bank oversight, which is a useful check on
management's appetite for risk.
Management has shown its ability to manage land and development spending. HOV
spent roughly $236 million on land and development during the first nine months
of 2012. This compares to $305 million of land and development spending during
the first nine months of fiscal 2011. The company entered into a $250 million
land-banking arrangement with GSO Capital Partners LP (GSO), the credit arm of
The Blackstone Group. Funds managed by GSO will acquire a portfolio of land
parcels and option finished lots on a quarterly takedown basis back to HOV.
This arrangement allows the company to effectively control some land on a
just-in-time basis, turn its inventory faster, and reduce capital that could be
tied-up in longer-term projects.
HOV had negative cash flow from operations ($90.2 million) for the latest 12
months (LTM) ended July 31, 2012. For all of fiscal 2012, Fitch expects the
company will be cash flow negative by $50 million to $75 million. Fitch also
anticipates the company will be cash flow negative in fiscal 2013 as it
continues to rebuild its land position. Fitch currently projects HOV's
unrestricted cash position will be between $150 million and $200 million by
At July 31, 2012, the company controlled 29,261 lots (including unconsolidated
joint ventures), of which 56.4% were owned and the remaining lots controlled
through options and joint venture partnerships. Based on LTM closings, HOV
controlled six years of land and owned roughly 3.4 years of land.
Future ratings and Outlooks will be influenced by broad housing-market trends as
well as company specific activity, such as trends in 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 especially free cash flow trends and uses, and the
company's cash position.
HOV's ratings are constrained in the intermediate term because of relatively
high leverage metrics. However, a positive rating action may be considered if
the recovery in housing is significantly stronger than the agency's current
outlook, if HOV's interest coverage is above 1x, and liquidity improves from
A negative rating action could be triggered if the industry recovery dissipates;
HOV's 2013 revenues drop mid-teens while the pretax loss approaches 2011 levels;
and HOV's liquidity position falls sharply, perhaps below $125 million.
Fitch affirms the following ratings for HOV:
--Long-term IDR at 'CCC';
--Senior secured first lien notes due 2020 at 'B-/RR2';
--Senior secured notes due 2021 at 'CCC-/RR5';
--Senior secured second lien notes due 2020 at 'CC/RR6';
--Senior unsecured notes at 'CC/RR6';
--Exchangeable note units due 2017 at 'CC/RR6';
--Series A perpetual preferred stock at 'C/RR6'.
Fitch's Recovery Rating (RR) of 'RR2' on HOV's senior secured first-lien notes
indicates good recovery prospects for holders of these debt issues. The 'RR5' on
the senior secured notes due 2021 indicates below-average recovery prospects in
a default scenario. The 'RR6' on HOV's senior secured second-lien notes, senior
unsecured notes, senior subordinated notes and preferred stock indicates poor
recovery prospects in a default scenario. 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 debtholders. Fitch applied a
liquidation value analysis for these RRs.