HOVNANIAN Enterprises Inc, New Jersey's largest home builder, sold US$600 million of five-year notes, its biggest one-day sale ever, to repay bank debt.
The securities pay an 11.5 percent interest rate, the most Hovnanian has paid on five-year debt, Bloomberg data shows. The notes can't be redeemed for two-and-a-half years.
They are second-lien notes, meaning senior secured debt-holders will get paid first, and were priced to yield 868 basis points more than similar US Treasuries.
They are secured by "substantially all the assets owned by the company," the New Jersey-based home builder said Friday in a statement. Proceeds from the sale of the notes will replace an existing US$900 million bank facility, reducing it to US$300 million, the company said.
"This is good news," said Vicki Bryan, senior high-yield bond analyst for New York-based Gimme Credit LLC, who gives the company an "outperform" rating. "It's very unusual for a home builder to get a deal done like this in a possible recessionary environment. It shows a lot of confidence in Hovnanian."
Hovnanian, which raised US$133 million in a share sale earlier this month, is trying to generate cash as the worst housing market since the 1930s continues to decline. In March, sales of new homes fell to their lowest rate since 1991 and the median price of a new home declined 13 percent from a year earlier, according to the US Census Bureau.
Moody's Investors Service assigned a Ba3 rating, three levels below investment grade, to the notes, the company said.
"The ratings reflect Hovnanian's ongoing losses, high debt leverage, elevated inventory levels and cash flow generation that only recently turned positive," Moody's analysts Glenn Eckert and Joseph Snider said in the report.
Standard & Poor's assigned a B+ rating to the notes, four levels below investment grade, according to a company statement.
Credit Suisse Group, Bank of America Corp, JPMorgan Chase & Co and Wachovia Corp managed the sale. Hovnanian, led by Chief Executive Officer Ara Hovnanian, said on May 8 that it raised US$133 million by selling 14 million new shares at US$9.50 each earlier this month.
The company may sell an additional 2.1 million shares to Citi Markets & Banking, Wachovia Capital Markets LLC and Credit Suisse Securities LLC, who managed the stock offering. The offering will expand the outstanding Class A stock by as much as one-third to about 64 million shares.
Hovnanian rose 8 cents to US$9.45 in New York Stock Exchange composite trading on Friday, increasing its gain this year to 32 percent. In the past 12 months, the company has lost 59 percent of its value, making Hovnanian the second-worst performer in a Standard & Poor's measure of the 15 largest home builders.