Fitch Affirms Hovnanian's IDR at 'CCC'; Withdraws Ratings

Hovnanian Enterprises

12/09/2019 22:37

(The following statement was released by the rating agency)


Fitch Ratings-Chicago-September 12: 

Fitch Ratings has affirmed and withdrawn Hovnanian Enterprises, Inc.'s (HOV) 
Long-Term Issuer Default Rating (IDR) and the ratings on its secured revolver 
and senior unsecured notes and term loan. Fitch has also downgraded and 
withdrawn the ratings on HOV's various secured notes. 

Fitch has withdrawn all of HOV's ratings for commercial purposes.

Key Rating Drivers

HOV's rating is influenced by its weak liquidity position and significant 
refinancing risk, along with a high debt load, which limited the company's 
ability to invest in land and grow revenue. HOV's capital structure is 
untenable, unless the company favorably refinances debt maturities and growth in 
the housing market, similar to 2015-2017 levels, is sustained for at least 
several more years (which is not in Fitch's base case scenario), allowing the 
company to see the benefits of its recent growth initiative. High Debt Load and 
Leverage: HOV had debt of about $1.8 billion, including $135.3 million of 
preferred stock, debt/EBITDA of 14.6x for the LTM ending April 30, 2019 and 
debt/capitalization above 100% as of July 31, 2019. Operating EBITDA/interest 
incurred was 0.8x for the LTM ending April 2019. Significant Refinancing Risks: 
The company has substantial debt maturing in the next few years, including $75 
million of secured bonds due in November 2020, $195 million of senior secured 
bonds maturing in November 2021 and $440 million of senior secured bonds due in 
July 2022. HOV has sufficient liquidity to repay $75 million of notes due in 
2020 but will have difficulty addressing the 2021 and 2022 maturities. There is 
significant refinancing risk as capital markets access is a challenge for HOV, 
and it is unlikely the company will generate sufficient cash flow to repay these 
notes.Debt Burden Constrains Growth: To generate future revenue HOV would need 
to invest in land and development activities, as it underinvested in new 
communities during the past few years to focus on debt reduction, resulting in 
lower community count and declining homebuilding revenue in fiscal 2017 and 
2018. The company increased its community count during the first half of fiscal 
2019, resulting in higher deliveries, net orders and backlog during the third 
quarter of 2019. Nevertheless, Fitch expects revenue will decline by low-single 
digits in fiscal 2019 as the benefits of the higher community count will not be 
fully realized until next year. We expect revenues will improve slightly in 
fiscal 2020 as a higher community count drives increased deliveries next year, 
assuming the economy continues to grow and the housing market slightly improves. 
However, given the company's liquidity position, Fitch believes HOV will be 
unable to reduce debt to more sustainable levels without shrinking its 
inventory, which will in turn constrain its ability to grow community count and 
revenue.

Derivation Summary

HOV's leverage (debt to capitalization above 100%) is meaningfully higher than 
its peers, including Beazer Homes USA, Inc. (B-/Stable). The company's high 
leverage and difficulty in refinancing debt maturities has limited HOV's ability 
to invest in new land holdings (and instead lowered inventory levels in 2016 and 
2017 to generate cash and pay down debt), resulting in lower community count and 
declining home deliveries and new orders in fiscal 2018 and the early part of 
2019. The company reported higher community count, deliveries, net orders and 
backlog on a year over year basis during the third quarter of 2019. However, 
Fitch does not expect the company will generate robust profitability and cash 
flow to meaningfully pay down debt and reduce leverage.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer- Total housing 
starts increase 1%, while new home sales grow more than 2% and existing home 
sales are modestly lower in 2019;- HOV's revenues decline low-single digits in 
2019 and grow low-single digits in 2020;- EBITDA margins decline modestly in 
2019 and 2020;- HOV reports negative CFFO of $50 million to $75 million;- The 
company continues to maintain liquidity (unrestricted cash plus revolver 
availability) at the high end of its $170 million - $245 million liquidity 
target.

RATING SENSITIVITIES

Rating Sensitivities are no longer relevant given today's rating withdrawals.

Liquidity and Debt Structure

Adequate Liquidity for Now: HOV currently has adequate liquidity with 
unrestricted cash of $83.6 million and no borrowings under its $125 million 
senior secured revolving credit facility (RCF) as of July 31, 2019. The secured 
RCF will terminate on Dec. 28, 2019 and any outstanding borrowings will convert 
to a secured term loan maturing on Dec. 28, 2022. Fitch expects HOV will fully 
draw the revolver prior to termination to provide incremental liquidity and will 
maintain liquidity at the high end of its $170 million-$245 million target 
through 2019. However, we expect liquidity to erode in future years, as HOV 
generates flat to negative CFFO, repays debt maturities and the revolver 
terminates in December 2019.Recovery Assumptions:The recovery analysis assumes 
that HOV would be reorganized as a going-concern in bankruptcy rather than 
liquidated. Fitch has assumed a 10% administrative claim. The going-concern 
EBITDA estimate of $132 million reflects Fitch's view of a sustainable, 
post-reorganization EBITDA level, upon which the agency bases the valuation of 
the company. The going-concern EBITDA is in line with the LTM EBITDA and also 
Fitch's 2019 EBITDA forecast. An EV multiple of 6x is used to calculate a 
post-reorganization valuation. Transactions involving homebuilding companies 
include a 9.5x enterprise value to EBITDA multiple on the 2018 acquisition of 
CalAtlantic Homes by Lennar Corporation (based on a transaction value of $9.3 
billion at the time of the announcement and Fitch-calculated EBITDA of $981 
million for CalAtlantic Homes for the LTM ending June 30, 2017). Trading 
multiples (EV/EBITDA) for public homebuilders currently average around 9.5x and 
has been in the 6.0x-10.x range for the past 12 months.HOV's various secured 
debt is collateralized by a first lien on specific assets, such as inventory, 
cash and investments in JVs. In our recovery analysis, Fitch used the percentage 
of cash and inventory, out of the total, securing the specific secured debt 
issues. We applied this percentage to the enterprise value to come up with an 
implied collateral value for each of the secured debt issues. This includes 
about 31.6% of the enterprise value allocated to non-recourse mortgage loans, 
39.4% allocated to the first-lien secured credit facility and 10.0% and 10.5% 
senior secured notes, and 15.3% of the enterprise value allocated to the 9.5% 
first-lien notes due in 2020 and 2% and 5% first-lien notes due in 2021. Fitch 
assumed the unencumbered assets and the excess value from property specifically 
pledged to certain lenders are distributed to unsecured claims on a pro rata 
basis, including the senior unsecured noteholders and the deficiency claim 
portion held by other secured lenders. The secured revolving credit facility is 
assumed to be fully drawn upon default. The allocation of value in the liability 
waterfall results in a recovery corresponding to an 'RR1' for the first-lien 
secured credit facility and an 'RR5' rating for the 10.0% and 10.5% senior 
secured notes due in 2022 and 2024. The first-lien secured credit facility and 
the 10.0% and 10.5% senior secured notes are collateralized by the same assets. 
However, the liens securing the 10.0% and 10.5% notes rank junior to the liens 
securing the credit facility.The allocation also results in a recovery 
corresponding to an RR4 for HOV's 5% and 2% senior secured notes due in 2021 and 
the 9.5% senior secured notes due in 2020, and a recovery corresponding to an 
RR6 for the senior unsecured notes and the company's preferred stock.The lower 
recoveries for HOV's secured notes relative to Fitch's previous analysis 
resulted from higher non-recourse mortgages, which increased from $95.6 million 
at year-end 2018 to $207.2 million as of July 31, 2019, and a higher allocation 
of the enterprise value to these non-recourse mortgage obligations.

ESG Considerations

Fitch assigned a score of '4' for HOV's ESG score under 'Financial Transparency" 
as a result of controversial refinancing transactions completed in 2018 that led 
to some litigation. The complaint alleged, among other things, improper and 
fraudulent structuring of transactions to impact the credit default swap market. 
On May 30, 2018, the parties signed a stipulation of dismissal with prejudice 
that ended the case as to all parties. This has a negative impact on the credit 
profile and is relevant to the rating in conjunction with other factors.

Hovnanian Enterprises, Inc.; Long Term Issuer Default Rating; Affirmed; CCC

; Long Term Issuer Default Rating; Withdrawn; WD

----preferred; Long Term Rating; Affirmed; C

----preferred; Long Term Rating; Withdrawn; WD

----senior secured; Long Term Rating; Affirmed; B

------USD 125 mln 10% revolving credit facility 28-Dec-2022 ; Long Term Rating; 
Affirmed; B

----senior secured; Long Term Rating; Withdrawn; WD

------USD 125 mln 10% revolving credit facility 28-Dec-2022 ; Long Term Rating; 
Withdrawn; WD

----senior secured; Long Term Rating; Withdrawn; WD

------senior secured bond/note 442488BT8; Long Term Rating; Withdrawn; WD

------senior secured bond/note 442488BU5; Long Term Rating; Withdrawn; WD

------1st lien USD 75 mln 9.5% bond/note 15-Nov-2020 442488CF7; Long Term 
Rating; Withdrawn; WD

----senior secured; Long Term Rating; Downgrade; CCC

------senior secured bond/note 442488BT8; Long Term Rating; Downgrade; CCC

------senior secured bond/note 442488BU5; Long Term Rating; Downgrade; CCC

------1st lien USD 75 mln 9.5% bond/note 15-Nov-2020 442488CF7; Long Term 
Rating; Downgrade; CCC

----senior unsecured; Long Term Rating; Withdrawn; WD

----senior unsecured; Long Term Rating; Affirmed; CC

----senior secured; Long Term Rating; Downgrade; CCC-

------USD 425 mln 10.5% bond/note 15-Jul-2024 442488CE0; Long Term Rating; 
Downgrade; CCC-

------USD 440 mln 10% bond/note 15-Jul-2022 442488CD2; Long Term Rating; 
Downgrade; CCC-

----senior secured; Long Term Rating; Withdrawn; WD

------USD 425 mln 10.5% bond/note 15-Jul-2024 442488CE0; Long Term Rating; 
Withdrawn; WD

------USD 440 mln 10% bond/note 15-Jul-2022 442488CD2; Long Term Rating; 
Withdrawn; WD

Contacts: 

Primary Rating Analyst

Robert Rulla, CPA

Senior Director

+1 312 606 2311

Fitch Ratings, Inc.

70 West Madison Street 

Chicago 60602

Secondary Rating Analyst

Jonathan Boise, 

Associate Director

+1 212 908 0622

Committee Chairperson

Stephen Brown, 

Senior Director

+1 312 368 3139

 

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: 
elizabeth.fogerty@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10089181

Solicitation Status 

https://www.fitchratings.com/site/pr/10089181#solicitation

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https://www.fitchratings.com/regulatory

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