Hovnanian Enterprises Inc. (NYSE: HOV) announced Monday morning that it will sell up to $775 million (WSJ subscription required) of seven-year notes in order to fund its previously reported tender offer for up to $759.3 million in debt. The struggling homebuilder also reported that $877 million of the notes were tendered by the early deadline on Friday. As a result, Hovnanian reduced the maximum amount of unsecured notes it will buy from $130 million to $100 million.
Last week, a Wall Street Journal article noted that Hovnanian is "hobbled" by its debt, even as the rest of the industry is ready to buy up land at a bargain. As of July 31, Hovnanian's net debt accounted for 109% of total capital, compared to an average of 26% for the dozen major homebuilders tracked by research firm Zelman & Associates.
Early in Monday's session, traders responded enthusiastically to Hovnanian's debt maneuvers, with the equity up more than 8% at its intraday peak. The stock is holding support at its 80-day and 20-week moving averages, but the shares remain stymied by long-term resistance from their 20-month trendline. Since December 2005, this technical roadblock has been toppled only once on a monthly closing basis.
However, the equity has a healthy supply of cash lingering on the sidelines, as short sellers have made their presence known. The number of HOV shares sold short surged by 36.3% during the past month, and short interest is now docked at its highest point since last February. Some of these bearish bettors were no doubt spooked by Monday's news, and short-covering support could help the stock extend its early gains.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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