Fitch Ratings, New York, on Monday cut its ratings on the debt of Hovnanian Enterprises (NYSE:HOV) further into junk status across the board, citing "persistent negative trends in HOV's operating margins, further deterioration in credit metrics and erosion in tangible net worth from non-cash real estate charges and operating losses."
Fitch dropped its Issuer Default Rating to a "CCC" from a "B-" and took the company's revolver down to a "B+/RRI" from "BB-/RR1"; its senior secured notes to a B+/RR1 from a "BB-/RR1"; its senior unsecured notes to "CC/RR5" from "CCC/RR4"; its senior subordinated notes to "C/RR6" from "CCC/RR6"; and its series A preferred stock to "C/RR6" from "CCC-/RR6." The debt ratings are based on a letter-grade scale with more letters indicating higher quality (an AAA is better than an single A or any B or C grade). The recovery ratings indicate likelihood of actual debt repayment, with "RR1" indicating a strong likelihood and "RR6" near a zero chance.
In announcing the downgrade, Fitch said, "Ratings for HOV are influenced by the company's execution of its business model, land policies and geographic, price point and product line diversity. HOV has been an active consolidator in the homebuilding industry which had contributed to above average growth during the seven years ending in 2005, but had kept debt levels somewhat higher than its peers. Above average leverage was also related to the company's delay in braking its internally generated expansion during the earlier stages of the housing contraction."
On a more positive note, Fitch also said, "Significant insider ownership aligns management's interests with HOV's long-term financial health."