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Fitch Affirms Hovnanian Enterprises, Inc.'s IDR at 'CCC'



  Fitch Affirms Hovnanian Enterprises, Inc.'s IDR at 'CCC'

Business Wire

CHICAGO -- December 07, 2012

Fitch Ratings has affirmed the ratings for Hovnanian Enterprises, Inc. (NYSE:
HOV), including the company's Issuer Default Rating (IDR), at 'CCC'. A
complete list of rating actions follows this release.

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.
The rating additionally reflects the company's liquidity position, substantial
debt and high leverage.

Fitch's housing forecasts for 2012 have been raised a few times this year but
still assume a below-trendline cyclical rise off a very low bottom. In a
slow-growth economy with somewhat diminished distressed home sales
competition, less competitive rental cost alternatives, and new and existing
home inventories at historically low levels, total housing starts should
improve 27.6%, while new home sales increase 19.9% and existing home sales
grow 9%. For 2013, total housing starts should grow 16.7% while new home sales
advance 22% and existing home sales improve 7%.

The company ended the July 2012 quarter with $219.3 million of unrestricted
cash on the balance sheet and no major debt maturities until calendar 2014,
when approximately $37 million of senior notes become due.

While the company currently has an adequate liquidity position, Fitch is
somewhat concerned that the company is willing to operate with a cash target
level of between $170 million and $245 million (including $48.1 million of
restricted cash) to take advantage of land acquisition opportunities. Given
that the company does not have a revolving credit facility, Fitch is concerned
that this level of cash does not provide a large enough liquidity cushion in
the event that the housing recovery dissipates. The absence of a bank credit
facility also means a lack of bank oversight, which is a useful check on
management's appetite for risk.

Management has shown its ability to manage land and development spending. HOV
spent roughly $236 million on land and development during the first nine
months of 2012. This compares to $305 million of land and development spending
during the first nine months of fiscal 2011. The company entered into a $250
million land-banking arrangement with GSO Capital Partners LP (GSO), the
credit arm of The Blackstone Group. Funds managed by GSO will acquire a
portfolio of land parcels and option finished lots on a quarterly takedown
basis back to HOV. This arrangement allows the company to effectively control
some land on a just-in-time basis, turn its inventory faster, and reduce
capital that could be tied-up in longer-term projects.

HOV had negative cash flow from operations ($90.2 million) for the latest 12
months (LTM) ended July 31, 2012. For all of fiscal 2012, Fitch expects the
company will be cash flow negative by $50 million to $75 million. Fitch also
anticipates the company will be cash flow negative in fiscal 2013 as it
continues to rebuild its land position. Fitch currently projects HOV's
unrestricted cash position will be between $150 million and $200 million by
year-end 2013.

At July 31, 2012, the company controlled 29,261 lots (including unconsolidated
joint ventures), of which 56.4% were owned and the remaining lots controlled
through options and joint venture partnerships. Based on LTM closings, HOV
controlled six years of land and owned roughly 3.4 years of land.

Future ratings and Outlooks will be influenced by broad housing-market trends
as well as company specific activity, such as trends in land and development
spending, general inventory levels, speculative inventory activity (including
the impact of high cancellation rates on such activity), gross and net new
order activity, debt levels and especially free cash flow trends and uses, and
the company's cash position.

HOV's ratings are constrained in the intermediate term because of relatively
high leverage metrics. However, a positive rating action may be considered if
the recovery in housing is significantly stronger than the agency's current
outlook, if HOV's interest coverage is above 1x, and liquidity improves from
current levels.

A negative rating action could be triggered if the industry recovery
dissipates; HOV's 2013 revenues drop mid-teens while the pretax loss
approaches 2011 levels; and HOV's liquidity position falls sharply, perhaps
below $125 million.

Fitch affirms the following ratings for HOV:

--Long-term IDR at 'CCC';

--Senior secured first lien notes due 2020 at 'B-/RR2';

--Senior secured notes due 2021 at 'CCC-/RR5';

--Senior secured second lien notes due 2020 at 'CC/RR6';

--Senior unsecured notes at 'CC/RR6';

--Exchangeable note units due 2017 at 'CC/RR6';

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

Fitch's Recovery Rating (RR) of 'RR2' on HOV's senior secured first-lien notes
indicates good recovery prospects for holders of these debt issues. The 'RR5'
on the senior secured notes due 2021 indicates below-average recovery
prospects in a default scenario. The 'RR6' on HOV's senior secured second-lien
notes, senior unsecured notes, senior subordinated notes and preferred stock
indicates poor recovery prospects in a default scenario. HOV's exposure to
claims made pursuant to performance bonds and the possibility that part of
these contingent liabilities would have a claim against the company's assets
were considered in determining the recovery for the unsecured debtholders.
Fitch applied a liquidation value analysis for these RRs.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Aug. 14, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contact:

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Robert Curran
Managing Director
+1-212-908-0515
or
Committee Chairperson
Craig Fraser
Managing Director
+1-212-908-0310
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
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