Solus hopes to improve CDS documentation after Hovnanian dispute

By Susanna Moon

Chicago, May 31 – Solus Alternative Asset Management LP said it aims to improve documentation for the credit-default swap market after resolving the dispute over the recent refinancing involving GSO Capital Partners LP, the credit arm of Blackstone, and Hovnanian Enterprises, Inc.

Under the settlement terms, GSO has “agreed not to support any future failure to pay events affecting Hovnanian,” according to a press release by Solus, a privately held investment manager.

The settlement terms included an agreement by GSO to consent to the amendments needed for Hovnanian to pay the interest that it did not make to its own subsidiary on May 1 before the grace period expired, which Hovnanian has now cured, the release noted.

Solus said in the statement: “We are very pleased to have resolved this matter. Solus looks forward to working alongside other market participants, regulators, and ISDA to improve existing CDS documentation and enhance the integrity of the credit derivatives market.”

Other terms of the agreement were not disclosed.

As reported, Hovnanian Enterprises’ wholly owned subsidiary, K. Hovnanian Enterprises, Inc., executed a supplemental indenture on May 30 for its 13˝% senior notes due 2026 and 5% senior notes due 2040 and paid the overdue interest on its 8% Sunrise Trail senior notes due 2019.

The payment of the overdue interest cured the default under the indenture governing the 8% notes.

The supplemental indenture to the 13˝% and 5% notes provides for amendments consented to by holders of at least a majority in principal amount of the outstanding notes of each series.

It eliminates the covenant restricting certain actions with respect to the $26 million of 8% notes that are held by Hovnanian Enterprises wholly owned subsidiary K. Hovnanian at Sunrise Trail III, LLC.

The covenant had included requirements that K. Hovnanian and the guarantors of the notes would not prior to June 6 redeem, cancel, retire, purchase or acquire any Sunrise Trail 8% notes or make any interest payments on the notes prior to their stated maturity.

K. Hovnanian and the guarantors of the notes were also prohibited from selling, transferring, conveying, leasing or otherwise disposing of any of the 8% notes other than to any subsidiary of the company that was not K. Hovnanian or a guarantor of the notes and from amending, supplementing or otherwise modifying the 8% notes or their indenture, with some exceptions.

In addition to eliminating the restrictive covenant, the supplemental indenture also eliminates events of default related to the eliminated covenant.

Because the covenant had prohibited paying interest on the affiliate-held 8% notes, the issuer did not make the $1.04 million interest payment due on those affiliate-held notes on May 1. It did make the interest payment due on the notes on that date for all non-affiliate-held 8% notes, as previously reported.

Hovnanian is a Matawan, N.J., homebuilder.

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