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Blackstone’s ‘rigged’ debt exchange might be a restructuring too far for CDS market

As GSO’s controversial Hovnanian refinancing ends up in court, the wider credit default swap (CDS) market is the loser.

When is a credit event not a credit event? That eternal question was approached from an unusual angle by New Jersey-based building firm Hovnanian at the end of last year when it agreed to intentionally default on some of its debt in return for fresh financing.

The move provoked uproar in the market with the slightly surreal sight of Goldman Sachs and a large US hedge fund entreating those in the CDS market to play fair and stick to the rules.

The dispute stems from a debt restructuring scheme put forward by GSO, part of the Blackstone Group. GSO has offered to refinance Hovnanian’s outstanding $1.6 billion debt load through an exchange: swapping its existing 8% 2019 bonds for a combination of cash and bonds maturing in 2026 and 2040.

The latter 22-year bond offers a coupon of just 5% – for a credit that is theoretically rated triple C minus. More of that later.

Some $26 million of the 8% bonds involved in the exchange will, however, be bought back by a Hovnanian affiliate. The plan is to miss an interest payment on these bonds, which will effectively be the firm defaulting on itself, but will trigger the Hovnanian CDS.

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