Hovnanian offer of better security for bondholders who lock in losses via exchange could set precedent, banker says

By Paul A. Harris

St. Louis, Oct. 31 - A private exchange offer undertaken by Hovnanian Enterprises, Inc. early in the Oct. 20 week could set a deleveraging precedent, said a banker who is following the situation.

The exchange targets $100 million of Hovnanian's 8% senior notes due 2012, $215 million of 6½% senior notes due 2014, $150 million 6 3/8% notes due 2014, $200 million 6¼% senior notes due 2015, $300 million 7½% senior notes due 2016, $300 million 6¼% notes due 2016 and $250 million 8 5/8% senior notes due 2017.

For each $1,000 principal amount of notes tendered, the principal amount of new notes to be issued will be $470 for the 8% notes, $400 for the 6½% notes, $400 for the 6 3/8% notes, $405 for the 6¼% notes due 2015, $410 for the 7½% notes, $415 for the 6¼% notes due 2016 and $420 for the 8 5/8% notes.

Those who tender will be exchanged into 18% senior secured notes due 2017.

This is more of a "deleveraging" situation than it is a "distressed" situation, the banker said, adding that Credit Suisse is leading the exchange.

Hovanian has $650 million of cash on the balance sheet and has subordinated notes coming due in 2010 through 2012, the source added.

Between the cash, and not targeting their front-end debt, the company demonstrates that it is attempting to deleverage by asking the bondholders to exchange into a new security with better collateral.

By asking existing bondholders to crystalize losses on the existing notes up front, in return for enhanced security in a new 18% senior secured note, the company essentially cuts leverage by about 60 cents on the dollar, the banker said.

Hovnanian is taking advantage of comparatively loose covenants and available security, the banker said, adding that other issuers who placed bonds in the often hot markets that prevailed earlier in this decade, and thus have comparatively loose bond covenants, are apt to attempt such strategies, reducing leverage by offering greater security farther out the maturity curve.

Thursday's MGM Mirage $750 million issue of 13% five-year senior secured notes (Ba1/BB) at 93.132 to yield 15%, according to an informed source, fit this profile somewhat. The company will use the proceeds of the offering to repay bank debt and for general corporate purposes.

MGM tended to issue bonds with investment-grade covenants, the banker explained, adding that Hovnanian, as well, has a very light covenant package.

"You exchange people out on the curve," the source said. "The investor gets ... a better collateral package and full covenants."

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