Surprised that HN likes this article:)<p>I'll start by laying out my biases and stating that I'm not a big fan of most PE firms.<p>I think most people understand that CDS are a few things.<p>1) usually bespoke in that each one is different, ie these are contracts that you approach a bank to write for you and not fungible like a share. This means they are generally illiquid and usually don't pay out.<p>2) These used to be used, and still are, as insurance for bond holders.<p>3) as everyone how as seen or read the Big Short now knows, they started to be used by third parties to speculate on bankruptcies.<p>4) They pay out only when the agreed upon terms are triggered<p>Blackstone, the PE firm holding the CDS's, is trying to get an otherwise healthy firm to "default" on some of their debt so that Blackstone can get the CDS payout.<p>The problem is that the firm doesn't need to default so Blackstone is enticing them with better funding rates for their debt if they just do a "tiny bit of defaulting".<p>Like I said, I don't really have alot of respect for PE firms.<p>This is dirty. If this is allowed to happen then who in their right mind would ever again underwrite a CDS for a companies debt if some other company can so easily force a default event.<p>I know that 2008 probably soured the term CDS for the average person but they are a very important part of the credit market and risk management.<p>Just to be clear, the companies bonds are trading at or above par value, indicating that investors have confidence in the company’s ability to satisfy its debts as they come due.
> 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.<p>If this is true, it should be illegal (and probably is). CDS is a derivative, and derivative traders are generally not permitted to manipulate the underliers of their products. It would be like buying stock on a particular expiry date to push a much larger, cash-settled digital option into the money. Expect a flurry of legal action if things go according to plan for GSO.
If I were in management I would take the deal from Blackstone, but only on the immutable condition that Blackstone defray all of the legal losses that may or may not arise from their proposal. See how much <i>they</i> really believe in this idea. My guess: probably not a lot.