The Great Blackstone Swaps Saga Just Became a Whole Lot Crazier

  • Hovnanian’s latest indebtednes exchange adds brand-new wrinkle in CDS drama
  • Move follows hypothesi GSO plan could be foiled in auction

One of the strangest Wall st. brawls in recent remembering remains going stranger.

For months now, Blackstone Group LP’s credit unit, GSO, has been trying to profit from a sweetheart obligation refinancing it offered an ailing New Jersey homebuilder. The schedule calls for Hovnanian Enterprises Inc. to engineer a default value that allows GSO to cash in on $333 million of insurance-like derivatives. Unsurprisingly, firms that exchanged the insurance, including Goldman Sachs Group Inc ., protested. One hedge fund even sued, alleging fraud.

Now, in a move that indicates just how odd this corner of the finance macrocosm can get, the homebuilder is expecting its creditors to give it refinance yet again — with new debt so cheap that even blue-chip borrowers would be jealous.

How might a junk-rated company draw away such a feat twice? The answer have nothing to do with Hovnanian’s creditworthiness and instead presents a window into the sometimes twisted incentives within the much smeared credit-default barters sell. It too stresses why some market participants are calling for an end to such trades.

Goldman Twist

As GSO endeavoured to wrap up its original swap, rumors twirled across ascribe marketplaces in recent weeks that Goldman and a hedge fund, Solus Alternative Asset Management, intends to outfox GSO. The gues was that they could drive up the price of Hovnanian’s debt, according to the report of market participants who asked not to be identified discussing trading in the privately negotiated barters. Such a move ought to have been limited GSO’s actual payout, which is directly tied to a CDS settlement auction to be held within the next few months.

GSO seemed to have had that crossed. As the members of the refinancing, Hovnanian and GSO caused enough low-priced bonds to muffle the final colonization cost and ensure a juicy payout on its CDS.

Enter Anchorage

But as interest in the Hovnanian CDS trade swelled, supposition has become apparent that Goldman, Solus and other houses would be able to line up so much better is asking for Hovnanian’s bails in the auction that it would effect tolls to surge, market participants said. The chattering redoubled after the other hedge fund, Anchorage Capital, building up its own position selling CDS default protection in anticipation that it could benefit from the clambering Hovnanian obligation tolls, the people said.

Representatives for Goldman and Anchorage declined to comment, and a spokesperson for Solus didn’t immediately comment.

All of this caused the value of Hovnanian’s CDS to plummet in recent weeks, with the upfront toll for contracts expiring in December falling from about $3.7 million per $10 million protected to as low-grade as $2.1 million.

That is, until Hovnanian’s move last week.

The homebuilder said Friday that it will swap so much better of $840 million of existing securities — which offer vouchers of at the least 10 percentage and grown-up within the next six years — for new alliances only 3 percent and maturing in 2047. If enough bondholders swap into the new securities, the market could soon be awash in even lower-priced attachments that would shape GSO’s payout even fatter. Sure enough, instants after Hovnanian’s announcement, the value of its CDS shot privilege back up.

GSO didn’t initiate the latest exchange, a spokesman said, but it hasn’t decided whether or not it will participate. A agent for Hovnanian declined to comment.

Still Fighting

Solus is still crusading GSO’s original refinancing in tribunal after a magistrate in January declined to grant a temporary order to block the deal. Hovnanian has stated that it will only go through with the latest refinancing if at least $150 million of its obligation is exchanged for the brand-new notes.
Such an give could only be designed for one type of investor: those who, like GSO, have bought assurance against a default, analysts at CreditSights Inc. said in an April 6 memorandum. Even Hovnanian drooped a suggestion in its regulatory filing announcing the exchange.

” There is the potential for an adverse impact to those entities who exchanged CDS if the new memoranda were to be deliverable” in a CDS auction, the company said.

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