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Goldman Slashes Its Position in a Controversial CDS Trade

Sridhar Natarajan
A man stands by a window at Goldman Sachs Group Inc. headquarters in New York, U.S., on Monday, Jan. 13, 2014. Photographer: Ron Antonelli

A key player has had enough in one of the biggest credit-market tussles this year.

Goldman Sachs Group Inc. has dumped a big chunk of credit-default swaps linked to Hovnanian Enterprises Inc., according to people with knowledge of the matter. The firm cut loose months after finding itself entangled in a battle featuring Blackstone Group LP that has also invited the wrath of regulators.

The investment bank traded out of most of its position from the controversial trade in recent weeks, said the people, who asked not to be named because the sale is private. Goldman had written about $100 million in credit swaps protection tied to the homebuilder toward the end of last year, people with knowledge of the trades said at the time.

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Goldman’s holdings lost value after Blackstone crafted a plan with Hovnanian to provide cheap financing in exchange for the builder agreeing to default on some of its debt, potentially triggering payouts on the swaps.

The position left Goldman -- one of the biggest dealers in the credit-derivatives market -- aligned against Blackstone, a key client. The battle lines had caused some irritation between the two giants of finance, and the trade is still being litigated among the other participants in a federal court.

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A spokesman for Goldman Sachs declined to comment.

The price on the swaps has dropped in the past month amid concern regulators could block the CDS gambit, according to market participants. Hovnanian’s flubbed attempt this year at further boosting the payout on the CDS with another cheap financing deal may also have contributed to the decline in the value of the swaps, the people said.

The outstanding net CDS wagers on Hovnanian dropped by about $120 million in the past two weeks, according to industry data.

The crux of the deal that Hovnanian and Blackstone agreed on last year involved the builder refinancing debt with Blackstone’s credit unit, GSO Capital Partners. That included an agreement for the company to default on some of its debt to allow GSO to cash in on $333 million of credit default swaps. The company has already skipped an interest payment on a chunk of its debt, and if it doesn’t cure it in the next couple of weeks, it could be considered a default on the borrowings.

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A credit derivatives body will likely be called on to determine whether that would leave sellers of credit-swaps protection such as Goldman on the hook for payouts.

Hedge fund Solus Alternative Asset Management is still fighting the original refinancing deal in court in a case GSO has asked to be dismissed. A judge will hear arguments over the dismissal on July 11 in New York.

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