By Karen Brettell
NEW YORK, March 19 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
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
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
"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,"
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.