Hovnanian Swaps Drop, Bonds Climb on Lot Deal With Blackstone

Hovnanian Enterprises Inc. (HOV) bonds rose to the highest price since May 2011 and the cost to protect against its default declined after Blackstone Group LP agreed to buy a group of development lots from the homebuilder.

Hovnanian’s $797 million of 10.625 percent notes climbed 4.3 cents to 101.75 cents on the dollar at 3:54 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield fell to 10 percent from 11.4 percent. Credit-default swaps on Hovnanian’s debt dropped 8.4 percentage points to a mid-price of 30.1 percent upfront, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Blackstone’s GSO Capital Partners LP will add to a portfolio of Hovnanian housing development sites that totals 620 lots costing $65 million, including both acquisition and development expenses, the companies said today in a statement. GSO also intends to raise its equity stake in New Jersey’s biggest homebuilder by exchanging $15 million of Hovnanian’s notes for about 3.9 million shares.

The deal provides “a sizable liquidity source that will enable Hovnanian to buy enough land to grow the company,” JPMorgan Chase & Co. analysts led by Susan Berliner wrote in a note to investors today. “GSO now has a vested interest in HOV’s survival and perhaps” would be willing to provide additional capital, the analysts wrote.

Capital Boost

JPMorgan raised its recommendation on Red Bank, New Jersey- based Hovnanian debt to ‘neutral’ from ‘underweight,’ citing recovery in new-home sales and the capital boost provided by GSO. The debt-to-equity exchange should reduce Hovnanian’s interest expenses by $1.7 million, the analysts estimated.

Hovnanian reported its first profit after eight quarters of losses on June 6 as rising demand for new homes boosted revenue in the quarter ended April 30. New home sales rose to an annual rate of 369,000 in May, the most since April 2010, according to data from the Commerce Department.

“We firmly believe that the U.S. residential real-estate market has bottomed and that Hovnanian is uniquely positioned to capitalize on the recovery,” Doug Ostrover, GSO founding member and partner, said in the statement.

‘Sufficient Liquidity’

The $125 million deal with Blackstone announced today gives Hovnanian the option to buy back the lots on a quarterly basis. Hovnanian and New York-based Blackstone plan to identify additional land parcels totaling as much as $60 million to add to the portfolio, according to the statement.

“Many investors were worried that if the demand environment continued to improve, Hovnanian Enterprises would not have sufficient liquidity to participate in the housing recovery,” Barclays Plc analysts led by Vincent Foley wrote in a note to investors today. “This new partnership could solve this issue.”

Hovnanian’s credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, mean investors would pay $3.01 million initially and $500,000 annually to protect $10 million of the company’s debt.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net