Hovnanian Enterprises, one of the country’s largest homebuilders, took on loads of debt to acquire companies and land more than a decade ago only to see the housing market collapse in 2008 and property values tumble.
Today, the New Jersey-based firm, which includes K. Hovnanian, faces the risk of being delisted from the New York Stock Exchange as it continues to struggle with that debt.
The company said it will seek shareholder approval at its annual meeting on March 19 to conduct a reverse stock split in order keep it on the exchange.
Hovnanian’s stock needs to stay above $1 in order to meet the NYSE’s listing requirements. The stock closed at 75 cents on Monday.
The homebuilder’s troubles pertain to longstanding issues from the financial crisis. From the late 1990s until around 2006 it was in a buying mode and its debt piled up, according to the Wall Street Journal. The companies troubles are also piling up, now that some experts predict housing sales to continue to slow in 2019.
Because of that debt, Hovnanian was unable to make large acquisitions at a time when homebuilders were buying up land at distressed prices. When sales rebounded and demand for starter homes rose significantly, it couldn’t capitalize.
The company had a total of more than $1.1 billion in senior outstanding debt as of Oct. 31, 2018, according to its filing with the Securities and Exchange Commission. Its total revenue was $1.9 billion at the end of October.
One bright spot today: Hovnanian saw an uptick in home deliveries, which ticked up 2.4 percent to 1,829 in the fourth quarter, from 1,787 a year ago, according to its earnings release.
Hovnanian’s financial issues got more complicated in 2017, when the company borrowed money from hedge fund Solus Alternative Asset Management to pay off some of its other debts, as it neared payment deadlines. Solus then sold a number of credit default swap contracts on that debt, including to Blackstone Group subsidiary GSO Capital Partners.
With Hovnanian in need of a refinancing, GSO stepped in as a potential new lender, but with one major condition: GSO needed Hovnanian to default on some of its debt so it could reap millions in profits from its credit default swap contracts with Solus.
This triggered Solus’ lawsuit in which it accused GSO of engaging in illegal market manipulation. The lawsuit was settled in May without Hovnanian needing to default.