Fitch Assigns 'BB+' to Hovnanian Enterprises' $300MM Sr Debt Issue

Business Wire, August 2, 2005

NEW YORK -- Fitch Ratings has assigned a 'BB ' rating to Hovnanian Enterprises, Inc.'s (NYSE:HOV) $300 million 6.25% senior unsecured notes due Jan. 15, 2016. The Rating Outlook is Stable. The $300 million issue will be ranked on a pari passu basis with all other senior unsecured debt, including Hovnanian's revolving and letter of credit facility. Proceeds from the new debt issues will be used for general corporate purposes.

Ratings for Hovnanian are based on the company's successful execution of its business model, conservative land policies, and geographic, price point and product line diversity. The company has been an active consolidator in the homebuilding industry, which has contributed to above-average growth during the past six years, but has kept debt levels somewhat higher than its peers. Management has also exhibited an ability to quickly and successfully integrate its acquisitions. In any case, now that the company has reached current scale, there may be somewhat less use of acquisitions going forward and acquisitions may be smaller relative to Hovnanian's current size. Significant insider ownership aligns management's interests with the long-term financial health of the company.

Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest the company's aggressive, yet controlled growth strategy, concentration in California (29% of total deliveries) and Hovnanian's capitalization and size.

The company's EBITDA and EBIT-to-interest ratios tend to be close to the average public homebuilder, while inventory turnover tends to be moderately stronger. Hovnanian's leverage is somewhat higher and the debt-to-EBITDA ratio is slightly below the averages of its peers. Although the company has certainly benefited from the generally strong housing market of recent years, a degree of profit enhancement is also attributed to purchasing design and engineering, access to capital, and other scale economies that have been captured by the large national and regional public homebuilders in relation to nonpublic builders. These economies, the company's presale operating strategy, and a return on equity and assets orientation provide the framework to soften the margin impact of declining market conditions in comparison to previous cycles. Hovnanian's ratio of sales value of backlog to debt during the past few years has ranged between 1.6 times (x) to 2.3x and is currently 2.1x, a comfortable cushion.

Hovnanian employs conservative land and construction strategies. The company typically purchases land only after necessary entitlements have been obtained so that development or construction may begin as market conditions dictate. Hovnanian extensively uses lot options. The use of land option contracts without specific performance clauses gives the company the ability to renegotiate price/terms or void the option which limits down side risk in market downturns and provides the opportunity to hold land with minimal investment. At present 73.8% of its lots are controlled through options, a higher percentage than most public builders. Total lots, including those owned, were 104,098 at April 30, 2005. This represents a 6.6 year supply based on latest 12 months home deliveries. However, the company has one of the lowest owned lot positions in the industry, typically owning only a one- to two-year supply. An estimated 85%-90% of its homes are presold. The balance is homes under construction or homes completed in advance of a customer's order. Hovnanian's unconsolidated joint venture activity is growing but is still modest in size and conservatively levered.

Fitch estimates that in recent years at least half of Hovnanian's growth has resulted from a series of acquisitions, 15 during the past seven and a half years. (However, in each of the past four years, more than 90% of the company's growth in earnings has come from operations owned more than one year.) The acquisitions have enabled the company to grow its position and increase market share, often broadening product and customer bases in existing markets. They have also enabled the company to enter new markets. The combinations typically were funded by debt and to a lesser degree by stock and retained earnings. At times there were earn-outs, which reduced risk and served to retain key management. In the future, Hovnanian's acquisition strategy will focus on purchasing smaller builders and land portfolios in current markets and on making selected acquisitions in new markets if there is a good strategic fit and appropriate returns can be achieved. The key analysis will be return on capital as to whether an acquisition will be executed. Fitch believes that management would balance debt and stock as acquisition currency to maintain current credit ratios. The company is publicly committed to maintaining an average net debt/equity ratio of 1.0:1.0.

Hovnanian maintains a $1.2 billion revolving and letter of credit facility. The facility contains an accordion feature under which the aggregate commitment can be increased to $1.3 billion, subject to the availability of additional commitments. As of April 30, 2005, the outstanding balance under the agreement was $105.1 million. Also, as of the end of the second quarter, Hovnanian had issued $272.5 million of letters of credit, which reduces cash available under the agreement. The revolving credit agreement matures in July 2009. The company has irregularly purchased moderate amounts of its stock in the past. About 1.78 million shares remain in the current class A common stock repurchase authorization as of April 30, 2005.