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Opinion

Macaskill on markets: Hovnanian highlights Blackstone’s risky business

Blackstone-owned GSO Capital’s provision of financing for building firm Hovnanian, on condition that it defaults on debt in order to trigger a payout on default swaps, highlights the reputational risks for investors as they supplant banks in setting the agenda for the credit markets.

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The trade could cause conflict not just with bank dealers and rival investors who worry that engineering the exercise of default swaps could undermine the functioning of the derivatives markets that are used to hedge and measure credit exposure, but also within the Blackstone group.

A separate unit of Blackstone owns a stake in a hedge fund called Solus Alternative Asset Management that launched a legal battle to prevent the GSO Capital trade for Hovnanian from closing.

That bid by Solus was rejected by a court on January 29, removing the main obstacle to success for the deal.

The trade by GSO will therefore cause economic harm to another unit of Blackstone if it is completed as planned. 

The financing package was put together for struggling New Jersey homebuilding firm Hovnanian and approved by the corporate in January. 

Traders led by Ryan Mollett, a GSO Capital distressed debt manager in New York, structured a refinancing for Hovnanian that includes issuance of a new bond with a 5% coupon that is well below the market rate for the struggling building firm. 

A planned failure to pay interest on some existing debt would trigger the exercise of default swaps on Hovnanian, with the low-coupon bond becoming the cheapest to deliver for swap purposes as it will be priced well below par. 


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