Hovnanian offers to exchange up to $185 million of 8% notes due 2019

By Marisa Wong

Morgantown, W.Va., Dec. 28 – Hovnanian Enterprises, Inc. said its wholly owned subsidiary, K. Hovnanian Enterprises, Inc., has begun a private offer to exchange up to $185 million of its outstanding 8% senior notes due 2019 for cash, new 13½% senior notes due Feb. 1, 2026 and new 5% senior notes due Feb. 1, 2040.

The exchange offer will expire at 11:59 p.m. ET on Jan. 29. Tenders may be withdrawn at any time prior to 5 p.m. ET on Jan. 29.

In exchange for each $1,000 principal amount of existing notes tendered and accepted, holders will receive the following:

• A cash amount equal to the product of $1,000 multiplied by the quotient of $26 million divided by the total principal amount of the existing notes tendered in the exchange offer;

• An additional amount in cash equal to the product of the cash amount described above multiplied by 0.02000;

• A principal amount of new 2026 notes equal to the product of the difference of $1,000 minus the cash amount multiplied by 0.62827; and

• A principal amount of new 2040 notes equal to the product of the difference of $1,000 minus the cash amount multiplied by 0.62500.

Holders of existing notes tendered and accepted for exchange will not be entitled to receive accrued interest, if any, on their exchanged notes.

The aggregate exchange consideration for each participating holder for all existing notes tendered and accepted will be rounded down, if necessary, to $2,000 or the nearest whole multiple of $1,000 in excess of that. This rounded amount will be the principal amount of new notes holders will receive as part of their exchange consideration, and no additional cash will be paid in lieu of any principal amount of new notes not received as a result of rounding down.

If the amount of existing notes tendered by the expiration time exceeds the tender cap, the notes will be subject to proration.

Settlement is expected to take place within three business days of the expiration time.

According to a press release, an aggregate of $26 million principal amount of the existing notes that are tendered will be purchased by K. Hovnanian at Sunrise Trail III, LLC, one of the issuer’s wholly owned subsidiaries. The subsidiary purchaser will be responsible for the cash component of the exchange consideration to be paid in connection with the exchange offer.

The indenture governing the new 2026 notes and 2040 notes contains limitations on actions with respect to 8% notes purchased by K. Hovnanian at Sunrise Trail. Prior to June 6, K. Hovnanian may not redeem any purchased 8% notes or make any interest payments on those notes prior to their maturity. Also, K. Hovnanian may not sell, transfer or amend those notes. In addition, under the indenture governing the new notes, at all times on or after June 6 and prior to the notes’ stated maturity, K. Hovnanian at Sunrise Trail must continue to own and hold at least the minimum denomination of those notes.

In connection with the exchange offer, Hovnanian and K. Hovnanian also entered into a commitment letter with GSO Capital Partners LP. GSO has committed to provide $132.5 million of initial term loans on the settlement date of the exchange offer for refinancing K. Hovnanian’s 7% senior notes due 2019 and up to $80 million of delayed-draw term loans for redeeming any 8% notes due 2019 that are not exchanged in the offer.

GSO has also committed an up to $125 million senior secured first-lien revolving credit facility to fund the repayment of K. Hovnanian’s $75 million senior secured term loan and for other general corporate purposes.

In addition, under the commitment letter, K. Hovnanian has agreed to issue to GSO on Jan. 15, 2019 $25 million of 10½% senior secured notes due 2024.

The exchange offer is conditioned on, among other things, entry into the financing arrangements with GSO; at least $140 million of existing notes being tendered for exchange; a support agreement taking effect; and receiving consents from a majority of K. Hovnanian’s 10% senior secured notes due 2022 and the 10½% notes to some proposed amendments to the indenture governing the 10% and 10½% notes.

Under the support agreement entered into on Thursday, some GSO funds have agreed to participate in the exchange offer. These parties have agreed to tender $106,378,000 of the 8% notes due 2019 held as of Dec. 28, $20.44 million of the existing notes beneficially owned as of Dec. 28 that are subject to a repurchase agreement and any existing notes acquired after that date.

Global Bondholder Services Corp. (866 470-4300 or 212 430-3774) is the exchange agent and information agent for the exchange offer.

Hovnanian Enterprises is a homebuilder based in Red Bank, N.J.

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