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Matt Levine

Blackstone May Do Its Cleverest CDS Trade Again

If it works, it would pass over from the realm of finance to art.
These houses could soon be built using credit derivatives.

These houses could soon be built using credit derivatives.

Photographer: Patrick T. Fallon/Bloomberg

One of the great credit derivatives trades was when Blackstone Group LP's GSO Capital Partners credit fund bought credit default swaps on distressed Spanish gaming company Codere SA, offered Codere some much-needed refinancing of its debt, but demanded in exchange that Codere make an interest payment on its bonds a few days late. By doing that, Codere was -- briefly -- in default, and so GSO's credit default swaps were triggered and it could make a profit on them. It is the only credit derivatives trade that I can think of that got its own segment on Jon Stewart's "Daily Show," which makes it presumptively the funniest credit derivatives trade ever, outside of the financial crisis. And now GSO is revisiting its greatest hits:

GSO is the group proposing the trigger-and-refinance deal, just as it was in Codere, while White & Case is "representing a group of funds led by Solus Alternative Asset Management, which both owns Hovnanian’s bonds and sold credit-default swaps that guarantee the company won’t miss a debt payment." And as in Codere, the default could be a silly little thing: "Triggering such a default could be accomplished by delaying interest payment temporarily, or keeping some of Hovnanian’s small holding of 2017 notes outstanding beyond their maturity date." And as in Codere, Hovnanian could use the money: It has about $54 million of bonds coming due on Dec. 1, and "has been facing pressure amid declining sales and a deterioration in its credit metrics that have pushed ratings firms to cut its grade to the lowest rungs of junk."