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Two decades ago, Hovnanian Enterprises was facing a financial crisis. The housing crash had pushed the builder’s debt to record highs. Its balance sheet was weighed down by unsellable land and a risky 50% debt-to-capital ratio.
Executives have spent more than 15 years in overhaul mode, a slow but steady process involving over 40 transactions. I spoke with Hovnanian’s top executives to discuss its turnaround story.
“We underwent the beginning of what turned out to be a long series of complicated transactions—basically, just to get through another day, build some more homes, make more families happy, and then focus on our next financing to get us through the next year or two or three,” said Hovnanian Chief Executive Ara Hovnanian. “And so it went for the last 20 years.”
Crisis management
Hovnanian entered the 2008 financial crisis with roughly $2 billion in equity and $2 billion in debt. Executives considered the debt-to-capital ratio a conservative buffer. The recession proved them wrong as land and home values plummeted across the country. Equity swung to a negative $500 million and debt peaked at around $2.5 billion.
Executives saw a handful of paths forward: bankruptcy, sell the company or cede control to debt holders, all of which were nonstarters, according to Hovnanian, the CEO. Instead, management chose a grueling fourth path to make a series of complicated transactions to rebuild its balance sheet.
Capital management
Almost four years later, by November 2011, the company created two distinct credit groupings under one corporate roof, which meant that each had to effectively be managed as separate companies. Each unit had its own cash and assets, said finance chief Brad O’Connor. The change created significant challenges.
“We managed that business differently and much more carefully,” he said. Executives had to decide which pool would fund each new community based on available capital. They also had to monitor both to ensure neither ran dry. The upside of the arrangement, which was in place for around eight years, was it provided the company with an additional $200 million in liquidity that the homebuilder otherwise would not have had access to.
The two-pool arrangement was one of the most complex of the roughly 40 transactions, according to O’Connor, as was a controversial 2018 deal. A financing pact with Blackstone’s GSO Capital Partners involved proposed low-cost loans in exchange for the home builder missing a small interest payment to a Hovnanian subsidiary. This could have triggered payouts on credit-default insurance contracts and yielded significant payments, depending on market factors.
The plan sparked blowback. A hedge fund sued, and regulators circled. GSO ultimately settled the litigation. Hovnanian retained the low-cost loans and made the previously skipped interest payment.
“I was skeptical and some of our board members were also skeptical” initially, Hovnanian said of the deal. But “the reality is that it did not interfere with us living up to every obligation to everyone we had a financial relationship with.”
The conversation continues below.
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