By Tyler Durden
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, …read more