Senior Notes and Term Loan

Senior Notes and Term Loan balances as of

October 31, 2017

and

October

31,

2016,

were as follows:

(In thousands)	October 31, 2017(1)(2)		October 31, 2016(1)(2)
Senior Secured Term Loan, net of debt issuance costs	$	72,987	$	72,646
Senior Secured Notes:
7.25% Senior Secured First Lien Notes due October 15, 2020	$	-	$	569,641
10.0% Senior Secured Second Lien Notes due October 15, 2018 (net of discount)		-		68,951
9.125% Senior Secured Second Lien Notes due November 15, 2020		-		143,337
9.50% Senior Secured Notes due November 15, 2020		74,350		74,140
2.0% Senior Secured Notes due November 1, 2021 (net of discount)		53,058		53,022
5.0% Senior Secured Notes due November 1, 2021 (net of discount)		133,732		131,998
10.0% Senior Secured Notes due July 15, 2022		434,543		-
10.5% Senior Secured Notes due July 15, 2024		394,953		-
Total Senior Secured Notes, net of debt issuance costs	$	1,090,636	$	1,041,089
Senior Notes:
7.0% Senior Notes due January 15, 2019	$	131,957	$	148,800
8.0% Senior Notes due November 1, 2019		234,293		247,348
Total Senior Notes, net of debt issuance costs	$	366,250	$	396,148
11.0% Senior Amortizing Notes due December 1, 2017, net of debt issuance costs	$	2,045	$	6,152
Senior Exchangeable Notes due December 1, 2017, net of debt issuance costs	$	53,919	$	57,298

(

) “Notes payable and term loan” on our Consolidated Balance Sheets as of

October 31, 2017

and

October 31, 2016

consists of the total senior secured, senior, senior amortizing and senior exchangeable notes and senior secured term loan shown above, as well as accrued interest of

$41.8

million and

$32.4

million, respectively.

(

) As discussed in Note

we adopted ASU

2015

November 2016.

We applied the new guidance retrospectively to all prior periods presented in the financial statements to conform to the fiscal

2017

presentation. As a result,

$20.2

million of debt issuance costs at

October

31,

2016,

were reclassified from prepaids and other assets to a reduction in our senior secured term loan, senior secured, senior, senior amortizing and senior exchangeable notes. Debt issuance costs at

October 31, 2017

were

$16.1

million.

As of

October 31, 2017,

future maturities of our borrowings (assuming

exchange of our senior exchangeable notes), were as follows (

in thousands

Fiscal Year Ended October 31,
2018	$	56,002
2019		207,546
2020		235,961
2021		75,000
2022		635,000
Thereafter		400,000
Total	$	1,609,509

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, 2017 (

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

9.50%

2020

Notes (defined below) 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

credit agreement governing the Term Loans (defined below) and the indentures governing the notes outstanding at

October 31, 2017

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 nonrecourse indebtedness, certain permitted indebtedness and refinancing indebtedness (under the Term Loans and the

9.50%

2020

Notes, any new or refinancing indebtedness

may

not

be scheduled to mature earlier than

January 15, 2021 (

so long as

member of the JV Holdings Secured Group is an obligor thereon), or

February 15, 2021 (

if otherwise), and under the

10.0%

Senior Secured Notes due

2022

(the

“10.0%

2022

Notes”) and the

10.5%

Senior Secured Notes due

2024

(the

“10.5%

2024

Notes”), any refinancing indebtedness of the

7.0%

Senior Notes due

2019

(the

“7.0%

Notes”) and

8.0%

Senior Notes due

2019

(the

“8.0%

Notes” and together with the

7.0%

Notes, the

“2019

Notes”)

may

not

be scheduled to mature earlier than

July 16, 2024)),

pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness (with respect to the Term Loans and certain of the senior secured and senior notes) and common and preferred stock, make other restricted payments, including investments, sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets, enter into certain transactions with affiliates and make cash repayments of the

2019

Notes (with respect to the

10.0%

2022

Notes and

10.5%

2024

Notes). The credit agreement governing the Term Loans 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 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, 2017,

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

If our consolidated fixed charge coverage ratio, as defined in the agreements governing our debt instruments (other than the senior exchangeable note

units 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.

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.

Any 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

2017

During the year ended

October 31, 2017,

we repurchased in open market transactions

$17.5

million aggregate principal amount of

7.0%

Notes,

$14.0

million aggregate principal amount of

8.0%

Notes and

6,925

enior exchangeable note units representing

$6.9

million stated amount of senior exchangeable note units. The aggregate purchase price for these transactions was

$30.8

million, plus accrued and unpaid interest. These transactions resulted in a gain on extinguishment of debt of

$7.8

million, which is included as “Loss on Extinguishment of Debt” on the Consolidated Statement of Operations. This gain was offset by

$0.4

million of costs associated with the

9.50%

Senior Secured Notes due

2020

(the

“9.50%

2020

Notes”) issued during the

fourth

quarter of fiscal

2016

and the debt transactions during the

third

quarter of fiscal

2017

discussed below.

July 27, 2017,

K. Hovnanian issued

$440.0

million aggregate principal amount of

10.0%

2022

Notes and

$400.0

million aggregate principal amount of

10.5%

2024

Notes. The net proceeds from these issuances together with available cash were used to (i) purchase

$575,912,000

principal amount of

7.25%

Senior Secured First Lien Notes due

2020

(the

“7.25%

First Lien Notes”),

$87,321,000

principal amount of

9.125%

Senior Secured Second Lien Notes due

2020

(the

“9.125%

Second Lien Notes” and, together with the

7.25%

First Lien Notes, the “

2020

Secured Notes”) and all

$75,000,000

principal amount of

10.0%

Senior Secured Second Lien Notes due

2018

(the

“10.0%

Second Lien Notes”) that were tendered and accepted for purchase pursuant to K. Hovnanian’s offers to purchase for cash (the “Tender Offers”) any and all of the

7.25%

First Lien Notes, the

9.125%

Second Lien Notes and the

10.0%

Second Lien Notes and to pay related tender premiums and accrued and unpaid interest thereon to the date of purchase and (ii) satisfy and discharge all obligations (and cause the release of the liens on the collateral securing such indebtedness) under the indentures under which the

7.25%

First Lien Notes, the

9.125%

Second Lien Notes and the

10.0%

Second Lien Notes were issued and in connection therewith to call for redemption on

October 15, 2017

and on

November 15, 2017

all remaining

$1,088,000

principal amount of

7.25%

First Lien Notes and all remaining

$57,679,000

principal amount of

9.125%

Second Lien Notes, respectively, that were

not

validly tendered and purchased in the applicable Tender Offer in accordance with the redemption provisions of the indentures governing the

2020

Secured Notes. These transactions resulted in a loss on extinguishment of debt of

$42.3

million, which is included as “Loss on Extinguishment of Debt” on the Consolidated Statement of Operations.

The

10.0%

2022

Notes have a maturity of

July 15, 2022

and bear interest at a rate of

10.0%

per annum payable semi-annually on

January 15

and

July 15

of each year, commencing

January 15, 2018,

to holders of record at the close of business on

January 1

and

July 1,

as the case

may

be, immediately preceding such interest payment dates. The

10.0%

2022

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

July 15, 2019

100.0%

of their principal amount plus an applicable “Make-Whole Amount.” K. Hovnanian

may

also redeem some or all of the

10.0%

2022

Notes at

105.0%

of principal commencing

July 15, 2019,

102.50%

of principal commencing

July 15, 2020

and at

100.0%

of principal commencing

July 15, 2021.

In addition, K. Hovnanian

may

also redeem up to

35.0%

of the aggregate principal amount of the

10.0%

2022

Notes prior to

July 15, 2019

with the net cash proceeds from certain equity offerings at

110.0%

of principal.

The

10.5%

2024

Notes have a maturity of

July 15, 2024

and bear interest at a rate of

10.5%

per annum payable semi-annually on

January 15

and

July 15

of each year, commencing

January 15, 2018,

to holders of record at the close of business on

January 1

and

July 1,

as the case

may

be, immediately preceding such interest payment dates. The

10.5%

2024

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

July 15, 2020

100.0%

of their principal amount plus an applicable “Make-Whole Amount.” K. Hovnanian

may

also redeem some or all of the

10.5%

2024

Notes at

105.25%

of principal commencing

July 15, 2020,

102.625%

of principal commencing

July 15, 2021

and at

100.0%

of principal commencing

July 15, 2022.

In addition, K. Hovnanian

may

also redeem up to

35.0%

of the aggregate principal amount of the

10.5%

2024

Notes prior to

July 15, 2020

with the net cash proceeds from certain equity offerings at

110.50%

of principal.

All of K. Hovnanian

’s obligations under the

10.0%

2022

Notes and the

10.5%

2024

Notes are guaranteed by the Notes Guarantors. In addition to pledges of the equity interests in K. Hovnanian and the subsidiary Notes Guarantors which secure the

10.0%

2022

Notes and the

10.5%

2024

Notes, the

10.0%

2022

Notes and the

10.5%

2024

Notes and the guarantees thereof will also be secured in accordance with the terms of the indenture and security documents governing such Notes by pari passu liens on substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, in each case subject to permitted liens and certain exceptions (the collateral securing the

10.0%

2022

Notes and the

10.5%

2024

Notes will be the same as that securing the Term Loans). The liens securing the

10.0%

2022

Notes and the

10.5%

2024

Notes rank junior to the liens securing the Term Loans and any other future secured obligations that are senior in priority with respect to the assets securing the

10.0%

2022

Notes and the

10.5%

2024

Notes.

In connection with the issuance of the

10.0%

2022

Notes and the

10.5%

2024

Notes, K. Hovnanian and the Notes Guarantors entered into security and pledge agreements pursuant to which K. Hovnanian and the Notes Guarantors pledged substantially all of their assets to secure their obligations under the

10.0%

2022

Notes and the

10.5%

2024

Notes, subject to permitted liens and certain exceptions as set forth in such agreements. K. Hovnanian and the Notes 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 indenture governing the

10.0%

2022

Notes and the

10.5%

2024

Notes was entered into on

July 27, 2017

among K. Hovnanian, the Notes Guarantors and Wilmington Trust, National Association, as trustee and collateral agent. The covenants and events of default in the indenture are described above under “

—General”.

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.

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 (

) 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, (

) purchased

$75.0

million aggregate principal amount of

10.0%

Second Lien Notes issued by K. Hovnanian and guaranteed by the Notes Guarantors (all such notes were subsequently purchased in the Tender Offers as described above under “-Fiscal

2017”

), and (

) exchanged

$75.0

million aggregate principal amount of

9.125%

Second Lien Notes held by such Investor for

$75.0

million of newly issued

9.50%

2020

Notes issued by K. Hovnanian and guaranteed by the Notes Guarantors and the members of the JV Holdings Secured Group, for aggregate cash proceeds of approximately

$146.3

million, before expenses.

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

9.50%

2020

Notes have a maturity of

November 15, 2020,

and bear interest at a rate of

9.50%

per annum, payable semi-annually on

February 15

and

August 15

of each year, to holders of record at the close of business on

February 1

and

August 1,

as the case

may

be, immediately preceding such interest payment dates. The

9.50%

2020

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

9.50%

2020

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

9.50%

2020

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 are guaranteed by the Notes Guarantors. The Term Loan Facility and the guarantees thereof are secured, subject to permitted liens and other exceptions, on a

first

lien priority basis relative to the

10.0%

2022

Notes and the

10.5%

2024

Notes (and on a

first

lien super priority basis relative to future

first

lien indebtedness). The

9.50%

2020

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.

October 31, 2017,

the aggregate book value of the real

property that constituted collateral securing the Term Loans was

$419.9

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. Cash and cash equivalents collateral that secured the Term Loans was

$381.1

million as of

October 31, 2017,

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 addition, collateral securing the Term Loans includes equity interest in K Hovnanian and the subsidiary Notes Guarantors.

Other Secured Obligations

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

9.50%

2020

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, 2017,

the collateral securing the guarantees included (

)

$84.3

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); (

) $

128.9

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 (

) equity interests owned by 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

$88.2

million as of

October 31, 2017;

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 the Term Loan Facility, and thus have

not

guaranteed such indebtedness.

Senior Notes

K. Hovnanian

’s

7.0%

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

101.75%

of principal commencing

January 15, 2017

and

100.0%

of principal commencing

January 15, 2018.

K. Hovnanian

’s

8.0%

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

100.0%

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

100.0%

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 (

) a

zero

coupon senior exchangeable note due

December 1, 2017 (

a “Senior Exchangeable Note”) issued by K. Hovnanian, which bears

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 (

) 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, 2017,

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, in

November 2016,

K. Hovnanian purchased a total of

6,925

Units for an aggregate purchase price of

$6.9

million and during the year ended

October 31, 2017,

K. Hovnanian purchased certain Units as discussed above under “—Fiscal

2017”.

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.