S&P downgrades Hovnanian to CCC from CCC+, due in part to company's declining cash position, weak housing recovery

Michelle Rivera

NEW YORK , June 29, 2011 (press release) – Standard & Poor's Ratings Services today lowered its corporate credit ratings on Hovnanian Enterprises Inc. (Hovnanian) and its K. Hovnanian Enterprises Inc. (K. Hovnanian) subsidiary to 'CCC' from 'CCC+'. We also lowered our ratings on the companies' rated senior debt. We downgraded the first-lien senior secured notes to 'CCC' from 'CCC+' and downgraded the senior unsecured and senior subordinated notes to 'CC' from 'CCC-'. The '3' recovery rating on the first-lien notes and the '6' recovery rating on the senior unsecured and senior subordinated notes is unchanged. We affirmed our 'C' rating on the preferred securities and we withdrew our ratings on the second- and third-lien senior secured notes because the company repaid these notes.
"The downgrade was driven by Hovnanian's declining cash position as the company invests in land and new communities as a way to bolster gross profits," said credit analyst George Skoufis. "We also believe the housing recovery will be weaker and more protracted than we previously expected. As a result, the company will be challenged to ultimately address its highly leveraged balance sheet if it does not begin to improve profitability."
The negative outlook reflects the company's constrained liquidity and our view that Hovnanian's cash position will diminish if the company continues investing in new land while demand remains low and the company continues generating losses. We will lower our ratings further if housing operations continue to burn cash and the company cannot raise additional capital or we believe another distressed debt exchange is likely. We would consider raising our ratings on Hovnanian if housing demand strengthens such that volume levels grow to support the company moving toward profitability, which would better position Hovnanian to ultimately recapitalize its balance sheet.

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