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Tuesday, 25 September 2018

Hovnanian eyes debt swap, shrugs off consent worries

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  • Ara Hovnanian, president and chief executive of Hovnanian Enterprises Inc

US homebuilder Hovnanian indicated it will proceed with a contested debt swap even after some of its bondholders effectively declined to give their consent.

The company has riled the markets with a plan to intentionally default on a small portion of its debt in exchange for a new refinancing loan from Blackstone’s credit arm GSO.

The default would likely mean a payout for GSO on credit default swaps tied to Hovnanian - and a loss for hedge fund Solus, which sold the swaps and alleges the move is a fraud. 

Hovnanian had previously said it needed consent agreements from holders of two of its bonds to move forward with the swap, but after failing on one, it waived the condition, allowing the swap to go ahead anyway.

Solus alleges the “fraudulent scheme” will “pervert the normal operation of the CDS market”.

In court documents filed Monday, Hovnanian and GSO defended their agreement as the best financing deal available and asked the court to deny Solus’s motion to halt the exchange.

“Solus’s attempt to disrupt our refinancing transaction is not supported by the facts or the law and would gravely harm Hovnanian and our stakeholders,” a spokesperson for Hovnanian said.

In their filings, attorneys for Hovnanian and GSO said Solus had attempted to provide - with assistance from Goldman Sachs - its own financing to the company.

“Solus is not as ‘innocent’ as it claims,” the attorneys wrote. “It lost the competition to provide financing to Hovnanian.”

They said an injunction blocking the exchange would “impair Hovnanian’s chances to obtain new terms and threaten its viability”.

Working with Goldman, Solus had offered to provide US$400m-$500m of financing to Hovnanian at interest rates ranging from 8% to 10.75%, court documents filed as part of the suit show.

It had requested, however, that Hovnanian accept a provision that would have made a refinancing deal triggering payments on the CDS such as the one negotiated with GSO much more difficult to orchestrate.

Through the debt exchange, Hovnanian is offering holders of its 8% 2019s the chance to swap their holdings for a combination of cash and bonds maturing in 2026 and 2040.

The covenant changes would have given Hovnanian more flexibility to use cash to buy back the 2019s, which are unsecured, and any new notes issued to refinance them, such as the 2026s and 2040s.

The consent solicitation targeted Hovnanian’s 10% 2022 and 10.5% 2024 secured bonds.

The company did receive the required consents for the 2024s - which will be amended - but failed to meet the threshold for the 2022s.

 

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