Fitch Downgrades Hovnanian's IDR & Senior Unsecured to 'BB-'; Outlook Negative.

NEW YORK -- Fitch Ratings has downgraded Hovnanian Enterprises, Inc.'s (NYSE:HOV) ratings as follows:

--Issuer Default Rating (IDR) to 'BB-' from 'BB+';

--Senior unsecured to 'BB-' from 'BB+';

--Unsecured bank credit facility to 'BB-' from 'BB+';

--Senior subordinated notes to 'B' from 'BB-';

--Series A perpetual preferred stock to 'B-' from 'B+'.

The Rating Outlook remains Negative.

The downgrade reflects the current difficult U.S. housing environment, negative trends in HOV's operating margins, and meaningful deterioration in credit metrics, especially interest coverage and debt/EBITDA ratios. The company was slower than most in braking its growth, and consequently, inventories, although now starting to come down, are above comfort levels and debt leverage remains above the company's targeted levels. HOV has been cash flow positive in only one of the past six quarters and its liquidity cushion has narrowed in recent quarters.

The Negative Outlook for HOV reflects a more challenging outlook for homebuilders during the balance of calendar 2007 (largely due to disruptions and tightening of standards in the mortgage market) and probable future weakening in the housing market in 2008. Fitch has also taken into account the current and expected near-term deterioration in credit metrics, similar to the trends being experienced by others in the industry, and persistent high cancellation rates which add to speculative inventory totals.

Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new order activity, debt levels, and free cash flow trends and uses.

Fitch is sensitive to the potential of covenant violation for some of the homebuilders, particularly that of interest coverage. However, HOV is less exposed to a default under its credit facility related to interest coverage than most of its peers because the interest coverage covenant in the company's $1.5 billion unsecured credit facility does not trigger a default if leverage is below a certain threshold. However, the possibility of the housing downturn continuing longer and becoming deeper than anticipated could have broad ratings implications for homebuilders.

Ratings for HOV are influenced by the company's successful execution of its business model, conservative 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 past seven years, but has kept debt levels somewhat higher than its peers. Management has also exhibited an ability to quickly and successfully integrate its acquisitions. In any case, now that HOV has reached current scale there may be somewhat less use of acquisitions going forward and acquisitions may be smaller relative to the company's current size. Significant insider ownership aligns management's interests with HOV's long-term financial health.

HOV employs conservative land and construction strategies. The company typically purchases land only after necessary entitlements have been obtained so that development or construction may begin as market conditions dictate. HOV extensively uses lot options. The use of land option contracts without specific performance clauses gives HOV the ability to renegotiate price/terms or void the option which limits downside risk in market downturns and provides the opportunity to hold land with minimal investment. The company controls roughly a 5.6-year supply of land based on latest 12 months (LTM) home deliveries, 39.3% of which are owned and the balance controlled through options. An estimated 85%-90% of its homes are pre-sold. The balance is homes under construction or homes completed in advance of a customer's order. HOV's unconsolidated joint venture activity is growing but is still moderate in size and conservatively levered.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.