GSO's Goodman Backs Closing CDS Loophole That His Firm Mastered

(Bloomberg) -- It was good while it lasted. For Blackstone, anyway.

Now even Bennett Goodman, head of Blackstone Group LP’s GSO Capital Partners, says it might be time to change the rules that are allowing his firm to profit on credit-default swaps by manufacturing a default by a New Jersey homebuilder.

That trade, part of a debt refinancing for Hovnanian Enterprises Inc., ignited a controversy in the credit derivatives market and embroiled GSO in a lawsuit by a hedge fund that stands to lose money on the maneuver.

"If people want to change the rules that are written in black and white because they think it makes for a more effective market structure, we are all for it," Goodman said in a Bloomberg Television interview in New York. "We encourage it to happen."

Goodman’s comments follow the firestorm over a refinancing deal GSO struck with Hovnanian that requires the homebuilder to miss an interest payment on some bonds, in turn triggering payouts on CDS held by GSO. Hedge fund Solus Alternative Asset Management, which found itself on the hook for the potential payouts on the contracts, is seeking to block the deal, claiming market manipulation.

The case is without merit, Goodman said.

"When we have as a counter-party a distressed hedge fund, we know we are dealing with an aggressive litigious entity," he said. "However we are very proud of the fact that we delivered to a long-term client a very attractive capital solution."

GSO previously carried out a similar deal when it enticed Spanish gaming company Codere SA to delay an interest payment that triggered payouts on its credit-default swaps.

Last week in a filing, GSO asked a court to dismiss the lawsuit filed by Solus. In its motion, GSO had said Solus "seeks to transform its remorse" over selling immense amounts of Hovnanian CDS into a federal lawsuit.

In January, U.S. District Judge Laura Taylor Swain denied Solus’s request to temporarily block the deal. The judge said CDS market participants have the power through membership and participation in the International Swaps and Derivatives Association to create rules to offset the effect of risks created by engineered transactions.

ISDA says it’s assessing the situation.

“ISDA will continue to gather feedback from its members on whether further amendments to the definitions should be considered, especially with regards to engineered defaults,” Lauren Dobbs, a spokeswoman for the group, said in a statement.

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