Fitch Downgrades Hovnanian Enterprises, Inc.'s IDR to Restricted Default

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CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has lowered the Issuer Default Rating (IDR) of Hovnanian Enterprises, Inc. (NYSE: HOV) to Restricted Default (RD) from 'CCC'. The downgrade reflects Fitch's view that the debt exchange of certain of Hovnanian's existing senior unsecured notes for new senior secured notes is a distressed debt exchange under Fitch's 'Distressed Debt Exchange Criteria', published Aug. 12, 2011. Fitch anticipates adjusting the company's IDR to the appropriate level to reflect the new capital structure within the next 14 days.

Distressed Debt Exchange: On Oct. 31, 2011, Hovnanian announced that $141.8 million of existing senior unsecured notes maturing in 2014 and 2015 has been tendered and will be accepted in exchange for $141.8 million of new 5% senior secured notes due 2021. Pursuant to the exchange offer, holders of these notes will also receive a cash payment of $100 for each $1,000 principal amount that was properly tendered and accepted. The aggregate cash consideration is $14.2 million. Additionally, $53.2 million of existing senior unsecured notes maturing in 2016 and 2017 has been tendered and will be accepted in exchange for $53.2 million of new 2% senior secured notes due 2021. A total of $55.3 million of existing senior unsecured notes were tendered for the new 2% senior secured notes but only $53.2 million was accepted because of the maximum new issuance amount of $195 million for the combined 5% and 2% senior secured notes.

Fitch believes that the exchange offer represents a material reduction in terms vis-a-vis the terms of the notes being offered for exchange. In particular, there is a significant reduction in interest rate and a lengthy extension of the maturity date. Of course, the new notes will be secured by a first-priority lien on the assets of certain subsidiaries that are 'unrestricted subsidiaries' under the company's existing indentures. The assets of these subsidiaries are not collateral for the company's existing secured indebtedness. In addition, the company also received requisite consents to eliminate substantially all of the restrictive covenants and certain of the default provisions contained in the existing unsecured indentures, impairing the position of note holders that did not participate in the exchange offer. Furthermore, the exchange offer is being initiated as part of an ongoing restructuring of the company's capital structure to increase financial flexibility.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Distressed Debt Exchange' (Aug. 12, 2011);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Distressed Debt Exchange -- Global Cross-Sector Criteria - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649249

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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