Hovnanian Enterprises felt yet another repercussion from its recent FAS-109 charge when Standard & Poor's lowered the rating on its preferred stock to "CD" from "CCC+." The agency also placed its corporate credit, senior unsecured, and senior subordinated debt ratings on Hovnanian on CreditWatch with negative implications.

The downgrade comes on the heels of Hovnanian's nonpayment of a scheduled quarterly dividend on its $140 million series-A preferred stock, which was due Jan. 15, 2008. The company didn't make the payment because it tripped a covenant governing its unsecured notes payments if its fixed-charge coverage fell below two times. Its fixed charge dropped below the two-times covenant minimum for the fiscal year ending Oct. 31, 2007, and the January dividend payment was restricted.

"Because of the way their covenants were structured, they didn't come close to tripping them recently," said George Skoufis, a director with Standard & Poor's. "And they probably wouldn't have tripped them if it wasn't for their recent FAS-109 charge. This will be their first [time tripping a covenant]. Most of their peers have gone through one, if not two. Their interest coverage didn't come into effect until they reached a high-leverage period. It's their first, but clearly not the most opportune time. They had less onerous covenants in their bank agreement relative to their peers."

Standard & Poor's placed all other Hovnanian-related ratings on CreditWatch pending the completion of the company's negotiations with its banks. "Hopefully, they'll go in and negotiate covenants that give them ample cushions," Skoufis said. "How accommodative will the banks be at this point in the cycle? Will they want some security?"