GSO Beats Rival Funds to Hovnanian Deal in Credit Swaps Showdown
(Bloomberg) -- In a flurry of pre-New Year disclosures, homebuilder Hovnanian Enterprises Inc. said it’s taking a financing package offered by Blackstone Group’s GSO Capital Partners over the objections of a rival hedge-fund group.
The move could lead to payouts on credit-default swaps held by GSO, while helping Hovnanian win favorable terms to clean up its balance sheet. The terms allow Hovnanian to pay down debt coming due in the next couple of years and replace it with borrowings that won’t start maturing until well into the next decade, according to a statement. Its stock jumped 8.1 percent on Friday and has nearly doubled from the year’s lows in September.
Hovnanian’s management and board, which are both led by Ara Hovnanian, “evaluated a range of available options to strategically manage the company’s debt obligations, with several financial firms competing to refinance the company’s existing debt,” Hovnanian said in its statement. "After careful review and due diligence, the company decided to pursue the refinancing transactions with GSO."
The Red Bank, New Jersey-based builder, which hasn’t posted an annual profit since fiscal 2014, had a major chunk of debt coming due starting in a little over a year, and had been racing to determine how to manage it. Hovnanian had warned cash might run short, and debt-rating firms put it at close to the bottom of the junk spectrum.
Lenders stepped up to offer financing packages -- while also making side bets in derivatives markets on the outcome that could increase their returns.
The price to protect Hovnanian debt against default in the credit derivatives markets shot up in recent weeks. That would normally suggest the company is under immediate risk of buckling under its debt obligations, even though its shares and bonds showed few signs of panic.
GSO proposed lending to the company as long as the builder agreed to do it in a way that would trigger payments on its credit-default swaps, people with knowledge of the matter have said. That is an unusual component of a financing package, and would result in payouts for investors like GSO who had purchased the insurance-like swaps.
Other investors led by Solus Alternative Asset Management have been offering to lend money to the company, while selling protection against Hovnanian defaulting. That trade will profit if the company doesn’t default on its debt. Goldman Sachs Group Inc.’s credit trading desk as of earlier this month had built up a $200 million position on this bet.
The refinancing plan from GSO calls for a Hovnanian affiliate to buy back a $26 million piece of the company’s 8 percent 2019 bonds, while most of the remaining notes are being replaced with new debt.
A condition on the new notes prevents the company affiliate from paying interest on the bonds it holds prior to maturity. The next interest payment is due in May, according to data compiled by Bloomberg, and failure to pay interest at that time could be construed as a default event that triggers credit-default swaps.
An additional wrinkle in the company announcement was a typographical error that could have resulted in tens of millions of dollars in additional payouts in the event of a default that triggered the credit swaps. Hovnanian subsequently corrected that in an amended filing clarifying the terms.
Hovnanian had said that it intends to take the most favorable financing route that allows it to maintain flexibility.
“GSO has a long history of committing capital to Hovnanian and is pleased to continue supporting the company’s business by providing this financing,” a representative for New York-based Blackstone said in an email on Thursday. “This transaction puts Hovnanian in a stronger, long-term financial position.”
Peter Grauer, chairman of Bloomberg LP, is a non-executive director at GSO’s parent Blackstone Group LP.
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