Global Credit Research - 05 Feb 2018
New York, February 05, 2018 -- Moody's Investors Service upgraded Hovnanian Enterprises, Inc. ("Hovnanian") Corporate Family Rating to Caa1 from Caa2 as the company has made strides in reducing its near-to-midterm refinancing risk and Moody's believes that Hovnanian generates sufficient unleveraged free cash flow to cover its interest burden in the next 12-18 months. The company's speculative-grade liquidity rating was upgraded to SGL-3 from SGL-4 to indicate the improvement in its liquidity profile.
In conjunction with this rating action, Moody's also downgraded the company's Probability of Default to Ca-PD/LD in order to indicate the distressed exchange that took place among the company and the holders of its 7% Senior Notes due 2019 and 8% Senior Notes due 2019. We anticipate to upgrade the Probability of Default Rating to Caa1 shortly.
Moody's also assigned Caa3 ratings to the K. Hovnanian Enterprises, Inc.'s (K.Hovnanian) new unsecured notes: 13.5% $90.5MM due 2026 and 5% $90.1MM due 2040. The notes, along with cash on hand, will be used to execute the distressed change.
The following rating actions were taken:
Downgrades:
..Issuer: Hovnanian Enterprises, Inc.
.... Probability of Default Rating, Downgraded to Ca-PD/LD from Caa1-PD
Upgrades:
..Issuer: Hovnanian Enterprises, Inc.
.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4
.... Corporate Family Rating, Upgraded to Caa1 from Caa2
..Issuer: K. Hovnanian Enterprises, Inc.
....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD2) from B3 (LGD3)
Assignments:
..Issuer: K. Hovnanian Enterprises, Inc.
....Senior Unsecured Bank Credit Facility, Assigned Caa3 (LGD6)
....Senior Unsecured Regular Bond/Debenture, Assigned Caa3 (LGD6)
Affirmations:
..Issuer: Hovnanian Enterprises, Inc.
....Pref. Stock Preferred Stock, Affirmed Ca (LGD6)
..Issuer: K. Hovnanian Enterprises, Inc.
....Senior Secured Bank Credit Facility, Affirmed B2 (LGD2)
....Senior Secured Regular Bond/Debenture, Affirmed Caa2 (LGD4)
....Senior Unsecured Regular Bond/Debenture due 2019, Affirmed Caa3 (LGD6)
Outlook Actions:
..Issuer: Hovnanian Enterprises, Inc.
....Outlook, Remains Stable
..Issuer: K. Hovnanian Enterprises, Inc.
....Outlook, Remains Stable
RATINGS RATIONALE
The upgrade of the Corporate Family Rating to Caa1 from Caa2 recognizes Hovnanian's significantly improved debt maturity profile with the nearest significant maturity coming up in 2021. Furthermore, Hovnanian is anticipated to generate sufficient unleveraged cash flow, as it can pair back land purchases if need be, in 2018 to cover its interest payments. Homebuilding EBIT interest coverage is anticipated to be between 1x-1.4x in 2018.
At the same time, the rating continues to be pressured by the reduction in the revenue base and debt to capitalization in excess of 100%. However, despite declining revenues and community count, the company has shown contracts per community increase. For the 4Q2017, they were up 10% YoY.
The Speculative-Grade Liquidity (SGL) Rating of SGL-3 reflects Hovnanian's adequate liquidity profile over the next 12 to 18 months.
The SGL Rating takes into consideration internal liquidity, external liquidity, covenant compliance, and alternate liquidity. Hovnanian's internal liquidity is supported by its $463 million of cash on hand as of October 31, 2017. For 2018, we anticipate the cash balance to be around $213 million. The company has a $125 million revolving credit facility and we anticipate Hovnanian to have about $52 million of borrowings outstanding under it. Hovnanian is not subject to any financial maintenance covenants. Alternate sources of liquidity are limited.
The stable outlook is predicated on the successful completion of this transaction.
The ratings could be upgraded if the company's debt to capitalization improves to below 80%, interest coverage improves to above 1.5x, and its liquidity shows improvement as well.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Established in 1959 and headquartered in Red Bank, New Jersey, Hovnanian Enterprises, Inc. ("Hovnanian") designs, constructs and markets single-family detached homes and attached condominium apartments and townhouses. Homebuilding revenues for the last twelve months ended Oct 31, 2017 were approximately $1.8 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Tiina Siilaberg
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
