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After hours, Hovnanian (NYSE:HOV) announced they are issuing common Stock, tangible equity units and senior unsecured notes. Supposedly, the offer will consist of $50 million of common stock; 3,000,000 tangible equity units (each with a stated amount of $25 and comprised of a prepaid stock purchase contract and a senior subordinated amortizing note due 2014), and $150 million aggregate principal amount of senior unsecured notes due 2015.

The company intends to use the proceeds to fund the purchase of their 8% Senior Notes due 2012, 8⅞% Senior Subordinated Notes due 2012 and 7 3/4% Senior Subordinated Notes due 2013 pursuant to tender offers commenced Monday.

Selling equity securities to fund debt repurchases is a way of deleveraging the balance sheet - increasing equity and reducing debt. The market cap of the company is only ~$350 million, and they are looking to sell quite a bit of equity. This is a pretty clear signal that the company sees the stock as overpriced relative to its debt.

Also, this transaction is a way for the company to batten down the hatches. Missing an interest payment or bond maturity is an easy way to lose your job, and I don't think the market is very good for homebuilder CEOs/CFOs.

Disclosure: No position in HOV.

Source: Hovnanian Battens Down the Hatches