Hovnanian holders tender for exchange 72.14% of 8% notes due 2019; Solus issues ruling response

By Susanna Moon

Chicago, Jan. 30 – Hovnanian Enterprises, Inc. said holders had tendered for exchange $170,226,000, or 72.14%, of the 8% senior notes due 2019 issued by wholly owned subsidiary K. Hovnanian Enterprises, Inc.

As announced Dec. 28, Hovnanian was holding a private offer to exchange up to $185 million of the 8% notes for cash, new 13½% senior notes due Feb. 1, 2026 and new 5% senior notes due Feb. 1, 2040.

The exchange offer ended at 11:59 p.m. ET on Jan. 29.

In exchange for each $1,000 principal amount, Hovnanian will pay $155.7928871 in cash and issue $532.3092185 of new 2026 notes and $529.5386721 of new 2040 notes, according to a company press release.

Holders were to receive the following in exchange for each $1,000 principal amount:

• A cash amount equal to the product of $1,000 multiplied by the quotient of $26 million divided by the total principal amount of the existing notes tendered in the exchange offer;

• An additional amount in cash equal to the product of the cash amount described above multiplied by 0.02000;

• A principal amount of new 2026 notes equal to the product of the difference of $1,000 minus the cash amount multiplied by 0.62827; and

• A principal amount of new 2040 notes equal to the product of the difference of $1,000 minus the cash amount multiplied by 0.62500.

Holders will not receive accrued interest.

Settlement is expected to take place within three business days of the expiration time.

As previously announced, an aggregate of $26 million principal amount of the existing notes that are tendered will be purchased by K. Hovnanian at Sunrise Trail III, LLC, one of the issuer’s wholly owned subsidiaries. The subsidiary purchaser will be responsible for the cash component of the exchange consideration to be paid in connection with the exchange offer.

The indenture governing the new 2026 notes and 2040 notes contains limitations on actions with respect to 8% notes purchased by K. Hovnanian at Sunrise Trail. Prior to June 6, K. Hovnanian may not redeem any purchased 8% notes or make any interest payments on those notes prior to their maturity. Also, K. Hovnanian may not sell, transfer or amend those notes. In addition, under the indenture governing the new notes, at all times on or after June 6 and prior to the notes’ stated maturity, K. Hovnanian at Sunrise Trail must continue to own and hold at least the minimum denomination of those notes.

In connection with the exchange offer, Hovnanian and K. Hovnanian also entered into a commitment letter with GSO Capital Partners LP. GSO has committed to provide $132.5 million of initial term loans on the settlement date of the exchange offer for refinancing K. Hovnanian’s 7% senior notes due 2019 and up to $80 million of delayed-draw term loans for redeeming any 8% notes due 2019 that are not exchanged in the offer.

GSO has also committed an up to $125 million senior secured first-lien revolving credit facility to fund the repayment of K. Hovnanian’s $75 million senior secured term loan and for other general corporate purposes.

In addition, under the commitment letter, K. Hovnanian has agreed to issue to GSO on Jan. 15, 2019 $25 million of 10½% senior secured notes due 2024.

The exchange offer is conditioned on, among other things, entry into the financing arrangements with GSO; at least $140 million of existing notes being tendered for exchange; a support agreement taking effect; and receiving consents from a majority of K. Hovnanian’s 10% senior secured notes due 2022 and the 10½% notes to some proposed amendments to the indenture governing the 10% and 10½% notes.

Under the support agreement entered into on Thursday, some GSO funds have agreed to participate in the exchange offer. These parties have agreed to tender $106,378,000 of the 8% notes due 2019 held as of Dec. 28, $20.44 million of the existing notes beneficially owned as of Dec. 28 that are subject to a repurchase agreement and any existing notes acquired after that date.

Global Bondholder Services Corp. (866 470-4300 or 212 430-3774) is the exchange agent and information agent for the exchange offer.

Solus statement

Solus Alternative Asset Management issued a statement in response to Monday's ruling by U.S. district judge Laura Taylor Swain in the lawsuit against GSO Capital Partners LP, Hovnanian Enterprises, Inc., K. Hovnanian Enterprises, Inc., K Hovnanian at Sunrise Trail III, LLC, Ara K. Hovnanian and J. Larry Sorsby.

“Although Solus did not obtain a preliminary injunction to halt Hovnanian's exchange transaction, Judge Swain's decision in no way condones the underlying conduct of the defendants. As this motion was simply the first of many steps in the process of adjudicating this fraudulent scheme, Solus is pleased that the court's opinion confirmed the true nature and purpose of the challenged transaction,” according to a statement by Solus on Tuesday. As explicitly confirmed by the court, GSO began in February 2017 ‘to contemplate a transaction, inspired by a December 2016 intentional default and CDS credit event involving iHeart Communications, Inc., that would exploit features of the CDS market.’

“[This] new transaction would involve GSO purchasing CDS protection and then extending financing at favorable rates to the relevant reference entity in exchange for a covenant to default intentionally on a small number of the reference securities that had been transferred to a subsidiary of the reference entity in connection with the financing transaction, thus triggering a 'failure to pay' event requiring CDS sellers to settle with GSO and other CDS protection buyers.

“The court also found that the new 5% notes issued by Hovnanian – which ‘bear a substantially below market interest rate and unusually long term’ – are intended to ‘[trade] well below par so as to maximize monetary recovery for GSO under [a] CDS failure to pay credit event, by operation of the ‘cheapest-to-deliver’ rule.’”

The release continued that the court also said “’that the CDS market operates based on the market participants' ability to accurately assess risk, which such participants currently do based on the working assumption that Reference Entities will endeavor to avoid default whenever possible to protect their reputations and their access to capital markets.’ Defendants' transaction – particularly the engineered default – subverts this fundamental assumption.

“We very much look forward to the opportunity to address before the court and ISDA the merits of Solus' claims arising out of Hovnanian's and GSO's fraudulent conduct. In the meantime, we encourage CDS market participants to consider the implications of the position espoused by GSO's expert Dr. Robert Selvaggio that any sophisticated hedge fund with sufficient capital should consider implementing the strategy undertaken by GSO here, and that ‘a CFO would be remiss for not looking to enter into this type of transaction.’”

As reported Jan. 12, in connection with the exchange offer, Solus Alternative Asset Management LP filed a complaint on Jan. 11 in the U.S. District Court for the Southern District of New York against Hovnanian Enterprises, Inc., GSO Capital Partners LP, K. Hovnanian Enterprises, Inc., K. Hovnanian at Sunrise Trail III, LLC, Ara K. Hovnanian and J. Larry Sorsby.

The complaint alleges inadequate disclosure in the exchange offer documents, improper and fraudulent structuring of the transactions to impact the credit default swap market, violations of Sections 10(b), 14(e) and 20(a) of the Securities Exchange Act of 1934 and tortious interference with prospective economic advantage, according to the filings.

The court has scheduled a hearing on Jan. 25 for Solus’ motion for a preliminary injunction.

Hovnanian Enterprises is a homebuilder based in Red Bank, N.J.

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