Senior Notes and Term Loan

Senior Notes and Term Loan balances as of

October 31,

2016

and

2015,

were as follows:

	Year Ended
(In thousands)	October 31, 2016	October 31, 2015
Senior Secured Term Loan	$75,000	-
Senior Secured Notes:
7.25% Senior Secured First Lien Notes due October 15, 2020	$577,000	$577,000
10.0% Senior Secured Second Lien Notes due October 15, 2018 (net of discount)	71,482	-
9.125% Senior Secured Second Lien Notes due November 15, 2020	145,000	220,000
9.5% Senior Secured Notes due November 15, 2020	75,000	-
2.0% Senior Secured Notes due November 1, 2021 (net of discount)	53,149	53,139
5.0% Senior Secured Notes due November 1, 2021 (net of discount)	132,702	131,207
Total Senior Secured Notes	$1,054,333	$981,346
Senior Notes:
6.25% Senior Notes due January 15, 2016 (net of discount)	$-	$172,744
7.5% Senior Notes due May 15, 2016	-	86,532
8.625% Senior Notes due January 15, 2017	-	121,043
7.0% Senior Notes due January 15, 2019	150,000	150,000
8.0% Senior Notes due November 1, 2019	250,000	250,000
Total Senior Notes	$400,000	$780,319
11.0% Senior Amortizing Notes due December 1, 2017	$6,316	$12,811
Senior Exchangeable Notes due December 1, 2017	$57,841	$73,771

As of

October 31, 2016,

future maturities of our borrowings (assuming no exchange of our senior exchangeable notes), were as follows (

in thousands


Fiscal Year Ended October 31,
2017		$4,157
2018		135,093
2019		225,000
2020		827,000
2021		220,000
Thereafter		195,000
Total		$1,606,250

General

Except for K. Hovnanian, the issuer of the notes, our home mortgage subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures and certain of our title insurance subsidiaries, we and each of our subsidiaries are guarantors of the senior secured term loan and senior secured, senior, senior amortizing and senior exchangeable notes outstanding at

October 31, 2016

(collectively, the “Notes Guarantors”). In addition to the Notes Guarantors, the

5.0%

Senior Secured Notes due

2021

(the

“5.0%

2021

Notes”), the

2.0%

Senior Secured Notes due

2021

(the

“2.0%

2021

Notes” and together with the

5.0%

2021

Notes, the

“2021

Notes”) and the

9.5%

Senior Secured Notes due

2020

(collectively with the

2021

Notes, the “JV Holdings Secured Group Notes”) are guaranteed by K. Hovnanian JV Holdings, L.L.C. and its subsidiaries except for certain joint ventures and joint venture holding companies (collectively, the “JV Holdings Secured Group”). Members of the JV Holdings Secured Group do not guarantee K. Hovnanian's other indebtedness.

The Term Loan Credit Agreement (defined below) and the indentures governing the notes outstanding at

October 31, 2016

do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than certain permitted indebtedness and refinancing indebtedness, under the Term Loan and certain of the senior secured notes, any new or refinancing indebtedness

may

not be scheduled to mature earlier than

January 15, 2021

(so long as no member of the JV Holdings Secured Group is an obligor thereon), or

February 15, 2021

(if otherwise), and nonrecourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness (with respect to the Term Loan and certain of the senior secured and senior notes) and common and preferred stock, make other restricted payments, make investments, sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets and enter into certain transactions with affiliates. The Term Loan Credit Agreement and the indentures also contain events of default which would permit the lenders/holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Term Loan Facility (defined below) (the “Term Loans”)/notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Term Loans/notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Term Loans, material inaccuracy of representations and warranties and a change of control, and, with respect to the indentures governing the Term Loans and senior secured notes, the failure of the documents granting security for the Term Loans and senior secured notes to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the Term Loans and senior secured notes to be valid and perfected. As of

October 31, 2016,

we believe we were in compliance with the covenants of Term Loan Facility the indentures governing our outstanding notes.

Under the terms of our debt agreements, we have the right to make certain redemptions and prepayments and, depending on market conditions and covenant restrictions,

may

do so from time to time. We also continue to evaluate our capital structure and

may

also continue to make debt purchases and/or exchanges for debt or equity from time to time through

tender

offers, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

If our consolidated fixed charge coverage ratio, as defined in the agreements governing our debt instruments (other than the senior exchangeable notes discussed below), is less than

2.0

1.0,

we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying dividends, which are not cumulative, on our

7.625%

Series A Preferred Stock. We anticipate that we will continue to be restricted from paying dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our debt instruments or otherwise affect compliance with any of the covenants contained in our debt instruments.

As a result of our evaluation of our geographic operating footprint as it relates to our strategic objectives, we decided to exit the Minneapolis, MN and Raleigh, NC markets, and in the

third

quarter of fiscal

2016,

we completed the sale of our land portfolios in those markets. We have also decided to wind down our operations in the San Francisco Bay area in Northern California and in Tampa, FL by building and delivering homes to sell through our existing land position.

Any other liquidity enhancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness with certain maturity requirements as discussed above (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our business.

Fiscal

2016

January 15, 2016,

$172.7

million principal amount of our

6.25%

Senior Notes due

2016

matured and was paid and on

May 15, 2016,

$86.5

million principal amount of our

7.5%

Senior Notes due

2016

matured and was paid. On

October 11, 2016

(the next business day following the redemption date of

October 8, 2016),

all

$121.0

million principal amount of our

8.625%

Senior Notes due

2017

were redeemed for a redemption price of approximately

$126.1

million, which included accrued and unpaid interest. The redemption was funded with proceeds from the Term Loan and New Second Lien Notes discussed below.

September 8, 2016,

the Company and K. Hovnanian completed certain financing transactions with certain investment funds managed by affiliates of

H/2

Capital Partners LLC (collectively, the “Investor”) pursuant to which the Investor

(1)

funded a

$75.0

million senior secured term loan facility (the “Term Loan Facility”), which was borrowed by K. Hovnanian and guaranteed by the Notes Guarantors,

(2)

purchased

$75.0

million aggregate principal amount of

10.0%

Senior Secured Second Lien Notes due

October 15, 2018

(the “New Second Lien Notes”) issued by K. Hovnanian and guaranteed by the Notes Guarantors, and

(3)

exchanged

$75.0

million aggregate principal amount of Existing Second Lien Notes (defined below) held by such Investor for

$75.0

million of newly issued

9.50%

Senior Secured Notes due

November 15, 2020

issued by K. Hovnanian and guaranteed by the Notes Guarantors and the members of the JV Holdings Secured Group, (the “Exchange Notes” and together with the Term Loan Facility and the New Second Lien Notes, the “Financings”) for aggregate cash proceeds of

approximately $146.3

million, before expenses.

In accordance with the conditions of the Financings, K. Hovnanian used all of the proceeds from the Financings in excess of the aggregate amount of funds needed for the redemption of the

8.625%

Senior Notes due

2017

discussed above to repurchase Units (defined below) as discussed below under “Units.”

The Term Loan Facility has a maturity of

August 1, 2019

(provided that if any of K. Hovnanian’s

7.0%

Senior Notes due

2019

(the

“7.0%

Notes”) remain outstanding on

October 15, 2018,

the maturity date of the Term Loan Facility will be

October 15, 2018,

or if any refinancing indebtedness with respect to the

7.0%

Notes has a maturity date prior to

January 15, 2021,

the maturity date of the Term Loan Facility will be

October 15, 2018)

and bears interest at a rate equal to LIBOR plus an applicable margin of

7.0%

or, at K. Hovnanian’s option, a base rate plus an applicable margin of

6.0%,

payable monthly. At any time from and after

September 8, 2018,

K. Hovnanian

may

voluntarily repay outstanding Term Loans, provided that voluntary prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto are subject to customary breakage costs and voluntary prepayments made prior to

February 1, 2019

are subject to a premium equal to

1.0%

of the aggregate principal amount of the Term Loans so prepaid (any prepayment of the Term Loans made on or after

February 1, 2019

are without any prepayment premium).

The New Second Lien Notes have a maturity of

October 15, 2018,

and bear interest at a rate of

10.0%

per annum, payable semi annually on February

and August

of each year, commencing

February 15, 2017,

to holders of record at the close of business on February

and August

as the case

may

be, immediately preceding such interest payment dates. The New Second Lien Notes are redeemable in whole or in part at our option at any time prior to

July 15, 2018

100%

of their principal amount plus an applicable “Make Whole Amount.” At any time and from time to time on or after

July 15, 2018,

K. Hovnanian

may

also redeem some or all of the New Second Lien Notes at a redemption price equal to

100%

of their principal amount. In addition, we

may

also redeem up to

35%

of the aggregate principal amount of the New Second Lien Notes prior to

July 15, 2018

with the net cash proceeds from certain equity offerings at

110.00%

of principal.

The Exchange Notes have a maturity of

November 15, 2020,

and bear interest at a rate of

9.50%

per annum, payable semi annually on February

and August

of each year, commencing

February 15, 2017,

to holders of record at the close of business on February

and August

as the case

may

be, immediately preceding such interest payment dates. The Exchange Notes are redeemable in whole or in part at our option at any time prior to

November 15, 2018

100%

of their principal amount plus an applicable “Make Whole Amount.” At any time and from time to time on or after

November 15, 2018,

K. Hovnanian

may

also redeem some or all of the Exchange Notes at a redemption price equal to

100%

of their principal amount. In addition, we

may

also redeem up to

35%

of the aggregate principal amount of the Exchange Notes prior to

November 15, 2018

with the net cash proceeds from certain equity offerings at

109.50%

of principal.

All of K. Hovnanian’s obligations under the Term Loan Facility and the New Second Lien Notes are guaranteed by the Notes Guarantors. The Term Loan Facility and the guarantees thereof are secured on a

first

lien super priority basis relative to K. Hovnanian’s First Lien Notes (defined below), the Existing Second Lien Notes and the New Second Lien Notes, and the New Second Lien Notes and the guarantees thereof are secured on a pari passu

second

lien basis with K. Hovnanian’s Existing Second Lien Notes, by substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, in each case subject to permitted liens and certain exceptions. The Exchange Notes are guaranteed by the Notes Guarantors and the members of the JV Holdings

Secured Group. The Exchange Notes are secured on a pari passu

first

lien basis with K. Hovnanian’s

2021

Notes, by substantially all of the assets of the members of the JV Holdings Secured Group, subject to permitted liens and certain exceptions.

In connection with borrowing the Term Loan Facility and the issuance of the New Second Lien Notes and the Exchange Notes, K. Hovnanian and the applicable guarantors entered into security and pledge agreements pursuant to which K. Hovnanian, the Company and the applicable guarantors pledged substantially all of their assets to secure their obligations under the Term Loan Facility, the New Second Lien Notes and the Exchange Notes, subject to permitted liens and certain exceptions as set forth in such agreements. K. Hovnanian, the Company and the applicable guarantors also entered into applicable intercreditor and collateral agency agreements which set forth agreements with respect to the relative priority of their various secured obligations.

The Term Loan Facility was incurred pursuant to a Credit Agreement dated

July 29, 2016

(the “Term Loan Credit Agreement”) entered into among K. Hovnanian, the Notes Guarantors, Wilmington Trust, National Association, as administrative agent (the “Administrative Agent”) and the Investor. The Term Loan Credit Agreement contains representations and warranties, affirmative and restrictive covenants and customary events of default (discussed above under “General”).

The Indenture governing the New Second Lien Notes (the “New Second Lien Notes Indenture”) was

entered into on

September 8, 2016

among K. Hovnanian, the Notes Guarantors and Wilmington Trust, National Association, as trustee and collateral agent. The Indenture governing the Exchange Notes (the “Exchange Notes Indenture”) was entered into on

September 8, 2016

among K. Hovnanian, the Notes Guarantors, the members of the JV Holdings Secured Group and Wilmington Trust, National Association, as trustee and collateral agent. The covenants and events of default in the New Second Lien Notes Indenture and the Exchange Notes Indenture are described above under “—General”.

Senior Secured Notes

November 1,

2011, K.

Hovnanian issued

$141.8

million aggregate principal amount of

5.0%

2021

Notes and

$53.2

million aggregate principal amount of

2.0%

2021

Notes. The

5.0%

2021

Notes and the

2.0%

2021

Notes were issued as separate series under an indenture, but have substantially the same terms other than with respect to interest rate and related redemption provisions, and vote together as a single class. The

2021

Notes are redeemable in whole or in part at our option at any time, at

100.0%

of the principal amount plus the greater of

of the principal amount and an applicable “Make Whole Amount.”

The guarantees of the JV Holdings Secured Group with respect to the

2021

Notes and the Exchange Notes are secured, subject to permitted liens and other exceptions, by a

first

priority lien on substantially all of the assets of the members of the JV Holdings Secured Group. As of October

31,

2016,

the collateral securing the guarantees included

(1)

$78.7

million of cash and cash equivalents (subsequent to such date, fluctuations as a result of cash uses include general business operations and real estate and other investments along with cash inflow primarily from deliveries);

(2)

$128

million aggregate book value of real property of the JV Holdings Secured Group, which does not include the impact of inventory investments, home deliveries or impairments thereafter and which

may

differ from the value if it were appraised; and

(3)

equity interests in guarantors that are members of the JV Holdings Secured Group. Members of the JV Holdings Secured Group also own equity in joint ventures, either directly or indirectly through ownership of joint venture holding companies, with a book value

of $88.4

million as of

October 31, 2016;

this equity is not pledged to secure, and is not collateral for, the

2021

Notes. Members of the JV Holdings Secured Group are “unrestricted subsidiaries” under K. Hovnanian's other senior secured notes and senior notes, and thus have not guaranteed such indebtedness.

October 2,

2012, K.

Hovnanian issued

$577.0

million aggregate principal amount of

7.25%

Senior Secured First Lien Notes due

2020

(the "First Lien Notes") and

$220.0

million aggregate principal amount of

9.125%

Senior Secured Second Lien Notes due

2020

(the "Existing Second Lien Notes" and, together with the First Lien Notes, the

"2020

Secured Notes") in a private placement (subsequently,

$75.0

million aggregate principal amount of Existing Second Lien Notes were exchanged in the Financings for

$75.0

million of Exchange Notes). We

may

redeem some or all of the First Lien Notes at

103.625%

of principal commencing

October 15, 2016,

101.813%

of principal commencing

October 15, 2017

and

100%

of principal commencing

October 15, 2018.

may

redeem some or all of the Existing Second Lien Notes at

104.563%

of principal commencing

November 15, 2016,

102.281%

of principal commencing

November 15, 2017

and

100%

of principal commencing

November 15, 2018.

The First Lien Notes are secured by a

first

priority lien and the Existing Second Lien Notes and the New Second Lien Notes are secured by a

second

priority lien, in each case, subject to permitted liens and other exceptions, on substantially all the assets owned by K. Hovnanian and the Notes Guarantors. At

October 31, 2016,

the aggregate book value of the real property that constituted collateral securing the

2020

Secured Notes and the New Second Lien Notes was

$561

million, which does not include the impact of inventory investments, home deliveries or impairments thereafter and which

may

differ from the value if it were appraised. In addition, cash and cash equivalents collateral that secured the

2020

Secured Notes and the New Second Lien Notes was

$262.8

million as of

October 31, 2016,

which included

$1.7

million of restricted cash collateralizing certain letters of credit. Subsequent to such date, fluctuations as a result of cash uses include general business operations and real estate and other investments along with cash inflow primarily from deliveries.

In the

fourth

quarter of fiscal

2014,

K. Hovnanian solicited and obtained the requisite consent of holders of its

2020

Secured Notes to certain amendments to the indentures under which such notes were issued. K. Hovnanian paid an aggregate of

$3.3

million to holders who consented thereunder.

Senior Notes

January 10, 2014,

K. Hovnanian issued

$150.0

million aggregate principal amount of

7.0%

Senior Notes due

2019,

resulting in net proceeds of

$147.8

million. The notes are redeemable in whole or in part at our option at any time prior to

July 15, 2016

100%

of their principal amount plus an applicable “Make Whole Amount.” We

may

also redeem some or all of the notes at

103.5%

of principal commencing

July 15, 2016,

101.75%

of principal commencing

January 15, 2017

and

100%

of principal commencing

January 15, 2018.

November 5, 2014,

K. Hovnanian issued

$250.0

million aggregate principal amount of

8.0%

Senior Notes due

2019,

resulting in net proceeds of

$245.7

million. The notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to

August 1, 2019

at a redemption price equal to

100%

of their principal amount plus an applicable “Make Whole Amount.” At any time and from time to time on or after

August 1, 2019,

K. Hovnanian

may

also redeem some or all of the notes at a redemption price equal to

100%

of their principal amount.

Units

October 2, 2012,

the Company and K. Hovnanian issued

$100,000,000

aggregate stated amount of

6.0%

Exchangeable Note Units (the “Units”) (equivalent to

100,000

Units). Each

$1,000

stated amount of Units initially consists of

(1)

zero

coupon senior exchangeable note due

December 1, 2017

(a “Senior Exchangeable Note”) issued by K. Hovnanian, which bears no cash interest and has an initial principal amount of

$768.51

per Senior Exchangeable Note, and that will accrete to

$1,000

at maturity and

(2)

a senior amortizing note due

December 1, 2017

(a “Senior Amortizing Note”) issued by K. Hovnanian, which has an initial principal amount of

$231.49

per Senior Amortizing Note, bears interest at a rate of

11.0%

per annum, and has a final installment payment date of

December 1, 2017.

Each Unit

may

be separated into its constituent Senior Exchangeable Note and Senior Amortizing Note after the initial issuance date of the Units, and the separate components

may

be combined to create a Unit.

Each Senior Exchangeable Note had an initial principal amount of

$768.51

(which will accrete to

$1,000

over the term of the Senior Exchangeable Note at an annual rate of

5.17%

from the date of issuance, calculated on a semi annual bond equivalent yield basis). Holders

may

exchange their Senior Exchangeable Notes at their option at any time prior to

5:00

p.m., New York City time, on the business day immediately preceding

December 1,

2017. Each

Senior Exchangeable Note will be exchangeable for shares of Class A Common Stock at an initial exchange rate of

185.5288

shares of Class A Common Stock per Senior Exchangeable Note (equivalent to an initial exchange price, based on

$1,000

principal amount at maturity, of approximately

$5.39

per share of Class A Common Stock). The exchange rate will be subject to adjustment in certain events. If certain corporate events occur prior to the maturity date, the Company will increase the applicable exchange rate for any holder who elects to exchange its Senior Exchangeable Notes in connection with such corporate event. In addition, holders of Senior Exchangeable Notes will also have the right to require K. Hovnanian to repurchase such holders’ Senior Exchangeable Notes upon the occurrence of certain of these corporate events. As of

October 31, 2016,

18,305

Senior Exchangeable Notes have been converted into

3.4

million shares of our Class A Common Stock, all of which were converted during the

first

quarter of fiscal

2013.

September 2016,

K. Hovnanian purchased a total of

20,823

Units for an aggregate purchase price of

$20.6

million, the majority of which was funded with net proceeds from the Financings.

On each

June 1

and

December 1

(each, an “installment payment date”), K. Hovnanian will pay holders of Senior Amortizing Notes equal semi annual cash installments of

$30.00

per Senior Amortizing Note (except for the

June 1, 2013

installment payment, which was

$39.83

per Senior Amortizing Note), which cash payment in the aggregate will be equivalent to

6.0%

per year with respect to each

$1,000

stated amount of Units. Each installment will constitute a payment of interest (at a rate of

11.0%

per annum) and a partial repayment of principal on the Senior Amortizing Note. Following certain corporate events that occur prior to the maturity date, holders of the Senior Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Senior Amortizing Notes.