Investors Embrace Covenant-Dodging Bonds August 15, 2008

Bonds issued by Hovnanian Enterprises, Ply Gem and Nortek to pay off loans have all moved upward recently, despite the homebuilding-related companies' implied leverage ratio issues. Hovnanian's 11.5% '13 bonds were trading at 102-103 Thursday, up from 101 1/2-102 1/2 a week earlier. Ply Gem's 11.75% '13 bonds also climbed slightly and were trading around 90 Thursday; the company's covenant-free asset-based loan issued around the same time moved up to 89. Nortek's 10% '13 moved to 91-92 from 88-89.
All the bonds were issued in May or June and proceeds were used to pay off the companies' bank debt, releasing the companies from the loans' restrictive covenants. The maturities on the bonds are five years, to make them more closely resemble the loans they replaced, but they have much higher interest rates (CIN, 6/13).
One investor ...