Solus Statement On Preliminary Injunction Ruling
Solus Alternative Asset Management issued the following statement in response to yesterday's ruling by U.S. District Judge Laura Taylor Swain in its lawsuit against GSO Capital Partners L.P., 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. 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." As the Court further found, "[t]his 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 "trad[e] 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."
In addition to its factual findings regarding the purpose of the challenged transaction, the Court also found "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."