CORRECTED: At distressed yields, Hovnanian may be good

(Corrects spelling of analyst in fourth and fifth paragraph to Bryan)

By Karen Brettell - Analysis

NEW YORK (Reuters) - Credit spreads of Hovnanian Enterprises Inc. (HOV.N) are trading at levels that are close to implying distress, but with ample liquidity the upscale home builder's debt may be good value.

Hovnanian Enterprises reported a quarterly loss on Thursday and warned that conditions in most of the regions it operates in remain challenging, suggesting the housing market slump that has hit the industry hard is far from over.

The cost to insure its debt with credit default swaps rose by 22 basis points to 937 basis points, or $937,000 per year for five years to insure $10 million in debt.

"While we anticipate short-term volatility surrounding third quarter earnings, we expect Hovnanian to generate stronger performance in 2008 compared to 2007, and to maintain adequate liquidity through the cycle trough to reduce debt," Gimme Credit analyst Vicki Bryan said in a report on Friday.

Bryan has a buy recommendation on Hovnanian's 8 percent bonds that are yielding 13 percent.

Brian Bogart, analyst at KDP Investment Advisors, also has a "buy" recommendation on the home builder's bonds.

"In August, the company received tax refunds of $60 million, and is making progress on the sale of excess lots in the Fort Myers market, which the company considers its weakest," Bogart said in a report.

The company also reported less exposure to risky borrowers in the past quarter, than it had in 2006, he said. Two percent of loans in the third quarter of fiscal year 2007 were to subprime borrowers, compared to 11 percent in 2006. Adjustable rate mortgages represented 10 percent of the total for the same quarter, down from 32 percent in the fiscal year 2006.

"There are no significant debt maturities until 2012," Bogart said. "Given our expectations for continued adequate liquidity and increasing cash flow generation and debt reduction, we maintain our spotlight "buy" recommendations."

Analysts at Barclays Capital, however, view Hovnanian as a greater risk to see further deterioration in its results than peers Beazer Homes USA Inc. (BZH.N) and Standard Pacific Corp. (SPF.N), which are also trading at distressed spreads.

"With the October maturity now out of the way for Hovnanian, we acknowledge that the credit should probably be trading tighter at the moment than both Standard Pacific and Beazer," Barclays analyst Seth Glasser said in a report.

Hovnanian said in its earnings release that it has already placed the cash required to retire debt maturing in October with the trustee of the bonds.

However, "we remain of the view that Hovnanian's credit fundamentals will deteriorate more dramatically through year-end than will those at peers Standard-Pacific and Beazer Homes," Barclays said.

Standard Pacific closed around 17 basis points tighter than Hovnanian at 920 basis points. Swaps on Beazer Homes' debt are the weakest performers of the home builders, trading in the 1,100 basis point area.