The Real Deal New York

Blackstone, Solus settle Hovnanian credit default swap dispute

Agreement ends hedgie gamesmanship over the NJ builder's distressed debt
May 31, 2018 01:01PM

From left to right: Jon Gray, Ara Hovnanian, Chris Pucillo (Credit: Pixabay, University of Miami, Getty Images, and Salt Conference)

A showdown between a lender and a gambler over a New Jersey and South Florida home-construction empire has ended.

Solus Alternative Asset Management withdrew its lawsuit against Blackstone Group subsidiary GSO Capital Partners on Wednesday, after reaching a settlement on claims that GSO engineered a debt default by struggling builder Hovnanian Enterprises.

In 2017, Hovnanian, which had not made a profit since 2014, borrowed money from Solus to pay off other debts nearing payment deadlines. But Solus sold a number of credit default swap contracts on that debt, including to GSO, which bought them in a bet that Hovnanian would default on its debts to Solus.

With Hovnanian in need of a refinancing, GSO stepped in as potential new lender, but with one major condition: GSO needed Hovnanian to default on some of its debt so it could reap millions in profits from its credit default swap contracts with Solus. This triggered Solus’ lawsuit in which it accused GSO of engaging in illegal market manipulation.

Both Blackstone and Solus released statements saying they were happy to have resolved the suit.

“We are pleased that Hovnanian CDS will now reflect the actual creditworthiness of the company,” said Solus CEO Chris Pucillo in a statement cited by Bloomberg.

The confrontation between GSO and Solus is just one example of what many money managers see as a growing problem of manipulation in the derivatives market.Some major hedge funds, like Elliott Capital Management and Apollo Global Management, have organized to push for more regulation of so-called “manufactured defaults.” [Bloomberg] — Will Parker