As of last month, investors had bought and sold a net $668 million of default insurance on Hovnanian through the credit swaps market, according to the International Swaps & Derivatives Association.
In its letter, White & Case said that Hovnanian was considering a plan that could result in delayed interest or principal payments on its existing debt to win a favorable refinancing deal.
That arrangement would allow anyone who has purchased protection on Hovnanian’s debt through credit default swaps to profit off it. 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.
This article was provided by Bloomberg News.