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Hovnanian Falls Most in a Year on Wider-Than-Expected Loss

Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, fell the most in a year in New York trading after reporting a wider second-quarter loss than analysts estimated.

Hovnanian’s net loss for the three months ended April 30 widened to $72.7 million, or 69 cents a share, from $28.6 million, or 36 cents, a year earlier, the Red Bank, New Jersey-based company said in a statement yesterday after the close of trading. Analysts predicted a loss of 55 cents a share, the average of nine estimates in a Bloomberg survey.

The results “were well short of our (and the Street’s) expectations on most fronts as the housing market remains under pressure,” Vincent Foley and Cedric Morris, analysts with Barclays Capital Inc. in New York, wrote in a research note yesterday.

The stock fell 12 percent to $2.07 at 4:15 p.m. in New York Stock Exchange Composite trading, the biggest decline since June 2010. It has lost 49 percent this year, the worst performance in Bloomberg’s U.S. homebuilder index.

U.S. homebuilders are struggling with weak demand as unemployment hovers around 9 percent and foreclosures drag down prices of previously owned houses. Hovnanian, which specializes in communities of single-family homes, said the spring selling season was “disappointing.”

Falling Orders, Margins

Second-quarter revenue declined to $255.1 million from $318.6 million a year earlier. Net orders tumbled 17 percent to 1,166 homes. The company’s homebuilding gross margin, a measure of profitability, dropped to 14.8 percent from 17.3 percent.

The company is likely to have revenue of $265 million to $295 million in the third quarter, and $320 million to $350 million in the fourth quarter, Chief Executive Officer Ara Hovnanian said during a conference call with analysts today.

Bondholders are losing confidence in Hovnanian as the company uses its cash to buy land in the housing slump. The homebuilder’s cash and near-cash holdings fell to $353.7 million in the quarter from $783.1 million two years earlier.

The cost to protect the company’s debt with credit-default swaps ended yesterday at the highest level since Sept. 23, according to CMA, which is owned by the CME Group Inc. Contracts protecting against the company’s default for five years increased 2.1 percentage points today to 37.6 percent upfront as of 12:28 p.m. in New York, according to the data provider. That’s in addition to 5 percent a year, meaning it would cost $3.76 million initially and $500,000 annually to protect $10 million of Hovnanian debt.

Hedge Against Losses

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

“We understand the market’s concern with liquidity,” Chief Financial Officer Larry Sorsby said during today’s call. “It is something we are monitoring closely. However, our internal financial models give us the confidence that we have sufficient capital to grow our way back to profitability, even in a flat, non-recovering market.”

The company expects narrower losses in the third and fourth quarters, CEO Hovnanian said.

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