Fitch Ratings has assigned a 'B-/RR3' rating to Hovnanian Enterprises, Inc.'s (NYSE: HOV) $785 million, 10.625% senior secured notes due Oct. 15, 2016. Proceeds from the notes offering will be used to fund the previously announced tender offer for its outstanding senior secured notes and certain of its senior unsecured notes.

Fitch affirms HOV's ratings as follows:

--Issuer Default Rating (IDR) at 'CCC';

--Senior subordinated notes at 'C/RR6';

--Series A perpetual preferred stock at 'C/RR6'.

Fitch has also downgraded the following ratings:

--Senior secured notes (second lien) to 'C/RR6' from 'B+/RR1';

--Senior secured notes (third lien) to 'C/RR6' from 'B+/RR1';

--Senior unsecured notes to 'C/RR6' from 'CC/RR5'.

The Rating Outlook is Negative.

Fitch's Recovery Rating (RR) of '3' on HOV's senior secured notes indicates good (50%-70%) recovery prospects for holders of these debt issue. The 'RR6' on HOV's senior unsecured notes, senior subordinated notes and preferred stock indicates poor (0%-10%) recovery prospects in a default scenario. The downgrade of the existing senior secured notes (second and third lien) as well as the unsecured senior notes reflects lower recovery prospects as a result of the new first lien secured debt that is ranked ahead of these debt issues in the capital structure. HOV's exposure to claims made pursuant to performance bonds and the possibility that part of these contingent liabilities would have a claim against the company's assets were considered in determining the recovery for the unsecured debt holders. Fitch applied a liquidation value analysis for these RRs.

The ratings and Outlook for HOV reflect the current very difficult U.S. housing market and Fitch's expectations that the housing environment remains challenging into 2010. Nevertheless, there are more positive signals and developments for housing and related industries now than at any time previously in the downturn. Of course, challenges remain or are on the horizon that may not prevent a near-term bottom, but are likely to meaningfully moderate the early stages of a recovery.

Over the past few quarters, HOV has lowered its absolute debt level through the repurchase of debt in open market transactions and cash tender offers. Total homebuilding debt declined from $2.6 billion at Oct. 31, 2008 to $1.8 billion at July 31, 2009. The issuance of the new senior secured notes and the consummation of the previously announced tender offers also extend the company's debt maturities.

HOV also announced that it expects to terminate its existing $300 million revolving credit facility, which provided $100 million of borrowings for general corporate purposes and $200 million for the issuance of letters of credit. The company intends to enter into new agreements for the issuance of letters of credit. Consistent with Fitch's comment on certain homebuilders' termination of revolving credit facilities, in the absence of a revolving credit line, a consistently higher level of cash and equivalents than was typical should be maintained on the balance sheet, especially in these still uncertain times.

Fitch will continue to monitor broad housing market trends as well as company-specific activity, such as land and development spending, general inventory levels, speculative inventory activity, gross and net new-order activity, debt levels (including the potential for additional debt repurchases) and especially free cash flow trends and uses and the company's cash position.

Additional information is available at www.fitchratings.com.

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