Monday, January 31, 2011

K. Hovnanian Enterprises (HOV) Issuing Stock to Deleverage

After hours, Hovnanian (HOV) announced they are issuing sommon Stock, tangible equity units and senior unsecured notes. Supposedly, the offer will consist of $50 million of common stock; 3,000,000 tangible equity units (each with a stated amount of $25 and comprised of a prepaid stock purchase contract and a senior subordinated amortizing note due 2014), and $150 million aggregate principal amount of senior unsecured notes due 2015.

The company intends to use the proceeds to fund the purchase of their 8% Senior Notes due 2012, 8⅞% Senior Subordinated Notes due 2012 and 7 3/4% Senior Subordinated Notes due 2013 pursuant to tender offers which are being commenced today.

Selling equity securities to fund debt repurchases is a way of deleveraging the balance sheet - increasing equity and reducing debt. The market cap of the company is only ~$350 million, and they are looking to sell quite a bit of equity. This is a pretty clear signal that the company sees the stock as overpriced relative to its debt.

Also, this transaction is a way for the company to batten down the hatches. Missing an interest payment or bond maturity is an easy way to lose your job, and I don't think the market is very good for homebuilder CEOs/CFOs.


Eric said...

What's kept many REITs alive is the very low interest rates that allow them to refinance, repeatedly in some cases. Even though property values have fallen, significantly in some cases. I guess they're hoping rates will stay low for a long time, and they'll have enuf cash flow to ride things out. The HBs are in a different situation, though.

CP said...

Contracts protecting against Hovnanian’s default for five years fell 2.8 percentage points to 17 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $1.7 million initially and $500,000 annually to protect $10 million of the company’s debt.