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CDS Market On Verge Of "Irreparable Damage" In Escalating Feud Over Hovnanian Debt

Back in November, Bloomberg first profiled a fascinating story involving Hovnaian, whose credit derivatives swaps were soaring as if New Jersey’s largest homebuilder was about to default, even as its stocks and bonds show no signs of panic.

What was behind the divergence? As Bloomberg uncovered, the catalyst was a bizarre battle raging among hedge funds, with one group saying that the other has offered Hovnanian financing in return for taking steps that would trigger payouts on those derivatives. The claim came in a letter from law firm White & Case, which said it’s been made aware of a proposal in which Hovnanian would pursue a refinancing deal with the main intention of triggering a credit event that would lead to a payout on the credit-default swaps.

At the time the, Bloomberg identified the main actors as hedge fund Solus Alternative Asset Management, which owns both Hovnanian’s bonds and sold CDS guaranteeing the company won’t miss a debt payment, while its counterparty was Blackstone’s GSO Capital partners hedge fund, an investor with which Hovnanian has explored a restructuring that would trigger a CDS payout. What makes the deal unique, is that in order to secure the funds from GSO, Hovnanian had agreed to skip a payment on some of its existing bonds, triggering a technical default and a big payday for the hedge fund, which unlike Solus, was long Hovnanian CDS

.Fast forward to today, when the FT reports that derivatives traders are "crying foul" over the Blackstone-led refinancing deal for the US housebuilder Hovnanian, saying the controversial arrangement threatens to further undermine the shrinking market for credit default swaps.

According to the FT, GSO is able to offer attractive financing terms precisely because they stand to receive a payout on its CDS contracts. Others, including Goldman and credit hedge funds Citadel and Solus Alternative Asset Management, are on the other side of the CDS trades and stand to lose money.

While Goldman and Solus had offered Hovnanian an alternative refinancing deal, GSO and Hovnanian say their deal represents the best financing that was available to the company for replacing debt coming due in 2019. “The company appropriately utilized the most attractive financing techniques available,” said a GSO spokesperson.

https://www.zerohedge.com/news/2018-01-11/cds-market-verge-irreparable-damage-escalating-feud-over-hovnanian-debt