In a year of missteps across its trading business, Goldman Sachs finds itself in a dicey situation again.
This time, the bank’s credit trading desk is caught in the middle of a raging battle among hedge funds over the debt of big U.S. homebuilder Hovnanian Enterprises Inc. The flap was ignited by Blackstone Group LP’s credit unit, GSO Capital Partners, which is trying to convince the builder to accept a bond refinancing package. GSO’s plan would trigger payments on default insurance that it bought in the credit derivatives market.
Goldman’s problem? It could be on the hook for some of that default insurance after accumulating credit-default swaps and bond trades that add up to a roughly $200 million position, according to people with knowledge of the matter. The Wall Street titans are staring each other down as the tussle heads into a crucial stage, each seeking to influence the builder’s next steps.
It’s the kind of situation that brings into focus Goldman’s penchant for taking risk. The bank has been combating a slump in trading revenue across financial markets that has magnified its mistakes. The firm still derives more of its business from hedge funds than its peers, at times investing alongside those clients.
At times that has paid off in spades — and on occasions left it nursing bigger losses than other banks can stomach.
Representatives for New York-based Goldman Sachs Group Inc., GSO and Hovnanian declined to comment.
Goldman’s Hovnanian trades have been shepherded by Adam Savarese, a partner and the firm’s distressed-debt trading head. He had a hot streak in his first full year at the bank in 2016 before some of those successful trades soured.
The Hovnanian controversy revolves around the builder’s attempt to rein in its $1.6 billion debt load. It has bonds coming due in just over a year. Goldman had originally helped a group of investment firms put together a refinancing proposal that called for Hovnanian to issue new notes paying 11.5 percent, said the people with knowledge of the situation, who asked not to be identified because the talks are private.
Then Blackstone came along with what it pitched as a better deal, but with an unusual provision: Hovnanian had to agree to do it in a way that would trigger credit-default swaps, which are essentially side bets on whether the builder meets all of its debt obligations. That would lead to quick gains for GSO because it had been buying short-dated insurance contracts.
Mulling it Over
Hovnanian is still considering its options. The company indicated in a letter to its employees that it intends to take the most favorable financing route that allows it to maintain flexibility, according to a copy of the letter seen by Bloomberg.
Among its options is the original proposal put forward by Goldman and the group of investment firms, led by Solus Alternative Asset Management, the people said. The investors have been pressuring Hovnanian to reject GSO’s proposal, saying it will risk putting the company in legal hot water with its creditors. Goldman has been lobbying the company separately through its lawyers at Cleary Gottlieb, the people said.
Peter Grauer, chairman of Bloomberg LP, is a non-executive director at GSO parent Blackstone.
The builder could shed more light on the situation when it reports earnings Dec. 21. Any delay in making a decision might help Goldman contain losses even if Hovnanian sided with GSO, the people said. That’s because much of the default insurance that Goldman sold expires on Dec. 20.
One hurdle was cleared on Dec. 1, when Hovnanian paid a debt maturity, people with knowledge of the matter said. Absent an event of default in the next two weeks, the December credit swaps will expire without a payout.
Outside of the derivatives market, there’s been little angst about the situation. While Hovnanian’s bonds are deemed a high risk by credit raters, they are still mostly trading above par.
— With assistance by Lisa Abramowicz