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.
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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.
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.
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aul5bzgp8MHg
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