Friedman Kaplan Client GSO Achieves Victory in Closely Watched Case Challenging Hovnanian Exchange Offer
U.S. District Judge Laura Taylor Swain of the Southern District of New York today issued a decision denying Solus Alternative Asset Management’s request for a preliminary injunction to block a refinancing by New Jersey-based home builder Hovnanian Enterprises, Inc. with new debt provided by FK client GSO Capital Partners, a credit-oriented alternative asset manager that is part of Blackstone Group. The case has been closely followed by the financial press and, as noted by the Wall Street Journal, has “riveted credit derivatives market participants.”
Judge Swain’s decision paves the way for the cutting-edge transaction, which requires Hovnanian to skip a small interest payment on certain bonds, potentially triggering payments on credit default swaps, some of which are held by GSO. Solus has sold credit protection on Hovnanian, and therefore may be required to pay out on its CDS position.
In a complaint filed on January 11, Solus accused GSO of "bribing" Hovnanian with favorable loan terms in exchange for an agreement to trigger what Solus called a "sham default," and argued that the transaction posed an "existential threat" to the CDS market.
Following a nine-hour evidentiary hearing on January 25, Judge Swain issued a decision declining to block the transaction. The court found that Solus failed to show it or the CDS market would suffer "irreparable" harm absent an injunction.
Judge Swain wrote, “[T]he allegedly threatened community of CDS market participants, consisting of CDS traders and dealers, is a relatively insular and sophisticated subset of the public…The court need not and does not make a determination as to whether similar transactions will proliferate and whether the CDS market faces, as [one expert] hypothesizes, an ‘existential threat’ from such proliferation.”
“We are incredibly pleased with this victory,” said Friedman Kaplan partner Anne Beaumont. “Our team worked nearly day and night for two weeks, from the filing of Solus’ complaint on January 11 through the hearing on January 25. We couldn’t be happier with Judge Swain’s decision, which we believe to be reasonable and fair. We are pleased to have helped Hovnanian secure this critical refinancing transaction, and we look forward to defending the lawsuit as it proceeds.”