Distressed debt exchange leads to Hovnanian downgrade

US property company Hovnanian Enterprises has announced a debt exchange on its outstanding notes prompting a downgrade from S&P and Fitch yesterday, which viewed the exchange as distressed. 

Fitch lowered Hovnanian's rating to RD from CCC while S&P downgraded it to SD from CC.  

$141.8 million of senior unsecured notes due 2014 and 2015 will be swapped for the same amount of new 5% senior secured notes due 2021 plus $100 for each $1,000 of principal held. Also, $53.2 million of existing senior unsecured notes due 2016 and 2017 will be swapped for new 2% senior secured notes due 2021. 

While the rating agencies regard the actions as a form of default, the debt exchange will not by itself trigger Hovnanian credit default swaps, since debt exchanges are not included in the definition of a CDS credit event.