OREANDA-NEWS. Fitch Ratings has assigned the following ratings to Hovnanian Enterprises, Inc.'s (NYSE: HOV) proposed issuances:

--$75 million first lien term loan (T/L) due Aug. 1, 2019 'B/RR1';

--$75 million 10% senior secured second lien notes due Oct. 15, 2018 'CCC-/RR5';

--$75 million 9.5% senior secured notes due Nov. 15, 2020 'CCC+/RR3'.

The net proceeds from the T/L and the senior secured second lien notes issuances will be used to repay existing debt, including HOV's announcement of a tender offer to purchase for cash all of the company's $121 million 8.625% senior notes due 2017. Any excess proceeds from the consummation of the tender offer will be used to repurchase or repay debt securities with maturities in 2017, or as agreed upon, HOV's other indebtedness.

The new $75 million T/L will be secured on a super priority basis by the assets currently constituting collateral under HOV's existing $577 million 7.25% senior secured first lien notes due 2020, the new $75 million senior secured second lien notes due 2018, and the existing 9.125% senior secured second lien notes due 2020 ($220 million outstanding before the exchange noted below). The new T/L matures on Aug. 1, 2019 (or Oct. 15, 2018 if HOV's existing 7% senior notes due 2021 remain outstanding at that time or if any refinancing with respect to the 7% notes has a maturity date prior to January 2021).

The new $75 million 10% senior secured second lien notes will be secured on a pari passu second lien basis with HOV's existing second lien notes by substantially all of the assets of the company.

TENDER OFFER

In conjunction with the financing commitments announced by the company, HOV has commenced a tender offer to purchase for cash any and all of the company's 8.625% senior notes due 2017 ($121 million outstanding). The company is also soliciting consents of holders of the notes to proposed amendments to the indenture governing the notes to eliminate most of the restrictive covenants and certain events of default. The early tender offer expires on Aug. 11, 2016 and the tender offer will expire on Sept. 7, 2016.

EXCHANGE AGREEMENT

HOV has also entered into an exchange agreement with investors pursuant to which the investors will exchange $75 million of existing 9.125% senior secured second lien notes due 2020 ($220 million outstanding) for a newly issued $75 million of 9.5% senior secured notes due 2020. The new senior secured notes will be secured on a pari passu first lien basis with HOV's existing $141.8 million 5% senior secured notes due 2021 and $53.2 million 2% senior secured notes due 2021 by substantially all of the assets of the members of the secured group.

KEY RATING DRIVERS

The rating for HOV is influenced by the company's execution of its business model, land policies, and geographic, price point and product line diversity. Risk factors include the cyclical nature of the homebuilding industry, the company's high debt load, high leverage and weak liquidity position.

The proposed refinancing allows the company to address near-term debt maturities, although HOV continues to have meaningful debt coming due in 2017, 2018 and 2019. On a pro forma basis, HOV will have the following maturities: (calendar year) 2017 - $81.7 million (less any amounts repaid from the excess proceeds from the T/L and new second lien notes following the completion of the tender offer); 2018 - $75 million; and 2019 - $475 million.

LIQUIDITY

As of April 30, 2016, HOV had $120.7 million of unrestricted homebuilding cash and $2.6 million of borrowing availability under its $75 million unsecured revolving credit facility. Subsequent to the end of the quarter, the company received $75.1 million of net cash proceeds from sales of its land portfolios in its Minnesota and North Carolina markets and from the contribution of land to a new joint venture. In May 2016, the company also repaid $86.5 million of 7.5% senior unsecured notes that matured.

Fitch expects the company will generate positive cash flow from operations during fiscal year 2016 and end the year with about $150 million-$200 million of liquidity (unrestricted cash and revolver availability).

GENERALLY IMPROVING HOUSING MARKET

The housing recovery is expected to continue in 2016 after four years of a moderate recovery. A robust economy, healthy job creation, demographics, pent-up demand, steep rent increases, and further moderation in lending standards should stimulate housing activity. Housing starts should approximate 1.21 million with single-family volume of 0.797 million and multifamily starts of 0.413 million. New home sales should reach 574,000, up 14.6%. Existing home volume growth should be low-single digit (+3.0%). Average and median home prices should rise 3.0%-3.5%, higher than earlier forecasts because of still-tight inventories.

Fitch believes 2017 could prove to be almost a mirror image of 2016. Real economic growth should be similar, although overall inflation should be more pronounced. Interest rates will rise further but demographics and employment growth should be at least as positive in 2017. First-time buyers will continue to gradually represent a higher portion of housing purchases as qualification standards loosen further. Land and labor costs will inflate more rapidly than materials costs. Housing starts should total 1.311 million. Single-family volume should expand 10% to 877,000, while multifamily starts grow 5% to 434,000. New home sales should reach 640,000, up 11.5%. Existing home sales should gain 4% to 5.625 million. Average and median home prices should expand 2.0%-2.5% in 2017.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for HOV include:

--Industry single-family housing starts improve 11.5%, while new and existing home sales grow 14.6% and 3%, respectively in 2016. Fitch expects the housing upcycle to continue in 2017, with single-family starts forecast to improve 10% and new and existing home sales increase 11.5% and 4%, respectively;

--HOV's revenues increase 25%-30% during 2016;

--HOV generates positive FCF;

--The company ends FY2016 with about $150 million-$200 million of liquidity (combination of unrestricted cash and revolver availability).

RATING SENSITIVITIES

Negative rating actions may occur if HOV's liquidity position falls below $150 million and the company does not provide a credible plan to address its upcoming debt maturities.

Positive rating actions are unlikely in the next 12 months as liquidity remains constrained, leverage is expected to remain elevated, and coverage will continue to be weak. However, Fitch may consider a positive rating action if the housing recovery is meaningfully better than our current outlook and is maintained over a multi-year period, allowing HOV to significantly improve its liquidity position and credit metrics.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

--$75 million first lien term loan due Aug. 1, 2019 'B/RR1';

--$75 million 10% senior secured second lien notes due Oct. 15, 2018 'CCC-/RR5';

--$75 million 9.5% senior secured notes due Nov. 15, 2020 'CCC+/RR3'.

Fitch currently rates HOV as follows:

--Issuer Default Rating 'CCC';

--Senior secured first lien notes due 2020 'B/RR1';

--Senior secured second lien notes due 2020 'CCC-/RR5';

--Senior secured notes (5% and 2%) due 2021 'CCC+/RR3';

--Senior unsecured notes 'CCC-/RR5';

--Series A perpetual preferred stock 'C/RR6'.

RECOVERY ANALYSIS

HOV's Recovery Ratings reflects Fitch's expectation that the enterprise value of the company will be maximized in a restructuring scenario (going concern). Fitch employs a 6x distressed EBITDA enterprise value multiple and assumes going concern EBITDA of $180 million.

The 'B/RR1' rating for HOV's new $75 million T/L and existing $577 million first lien senior secured notes reflect Fitch's estimate for a recovery range of 91% - 100%. The company's new T/L, first lien and second lien notes due 2020 are secured by $785.1 million of pledged inventory and pledged equity value of subsidiaries without inventory liens and $106.4 million of cash. Fitch rates HOV's second lien senior secured notes (including the new second lien notes) 'CCC-/RR5', reflecting 11% - 30% recovery for these debt issues.

The 'CCC+/RR3' rating for the company's new senior secured notes due 2020 and the existing 5% and 2% senior secured notes due 2021 reflect Fitch's estimate for a recovery range of 51% - 70%. These notes are secured by $167.7 million of pledged inventory and pledged equity value of subsidiaries without inventory liens, $16.5 million of cash, and HOV's interest in certain joint ventures.

Fitch's 'CCC-/RR5' rating on the company's senior unsecured notes reflects recovery of 11%-30% for these debtholders. Fitch assumed that the assets that are not pledged and the excess value from property specifically pledged to certain lenders is distributed to unsecured claims on a pro rata basis, including the senior unsecured noteholders and the undersecured claim portion held by other secured lenders.

The 'C/RR6' rating on HOV's preferred stock assumes zero recovery.