Moody’s cuts Hovnanian notes; rates loans B2, notes B3, Caa3

Moody's Investors Service said it rated K. Hovnanian Enterprises, Inc.'s proposed $75 million first-lien super priority term loan B2, proposed $75 million first-lien notes B3 and proposed $75 million second-lien notes Caa3.

The corporate family rating was affirmed at Caa2 and probability of default rating was affirmed at Caa2-PD.

Hovnanian's existing first-lien notes were downgraded to B3 from B2, existing second-lien notes were downgraded to Caa3 from Caa2 and existing unsecured notes were affirmed at Caa3.

The speculative-grade liquidity rating was affirmed at SGL-4 and the outlook remains negative.

Hovnanian is issuing $225 million of new debt as part of a private placement transaction with a specific investor in an effort to partially refinance its 2017 and 2020 debt maturities. It is proposing to issue $75 million 10% second-lien notes due 2018, $75 million first-lien super priority term loan due 2019 but with a springing maturity in 2018 when the 10% second-lien notes come due, and 9˝% first-lien notes due 2020.

Proceeds from the 10% notes and first-lien super priority term loan are expected to be applied toward Hovnanian's 2017 maturities and reduce those by $150 million to $60 million thereby pushing out the $150 million of maturing debt to the fourth quarter of 2018 (considering the springing maturity of the first-lien super priority term loan). However, Hovnanian's average interest rate on just the $150 million refinanced part of the 2017 debt securities increases to 8.9% (Libor plus 7% with 75 basis points floor first-lien super priority term loan and 10% second-lien notes) from about 8.1% ($121 million 8 5/8% senior notes and $29 million of senior exchangeable notes).

Furthermore, the company is replacing unsecured debt with secured debt.

The proposed 9˝% $75 million first-lien notes due 2020 are issued to convert the investor's current position in the company's 9 1/8% second-lien notes due also in 2020. This step provides this particular investor with a higher coupon and a first-lien claim on the assets.

Overall, Moody’s said the transaction demonstrates that Hovnanian's capital structure remains untenable because in order to enhance liquidity and push out less than 10% of its total debt maturities by just eight quarters Hovnanian needs to give up a significant amount of security for a hefty price. This is reflected in the Caa2 corporate family rating and negative outlook.

The downgrade of the existing debt securities' ratings in Hovnanian's multi-tiered debt capital structure is primarily due to the company having a greater amount of first lien debt, the agency said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.