"Hovnanian Enterprises and GSO Capital Partners Announce $125 Million Land Banking Arrangement" ($HOV)

Today's press release:

• Funds managed by GSO will acquire a portfolio of land parcels from Hovnanian and option finished lots on a quarterly takedown basis back to Hovnanian. As of July 12, 2012, GSO has closed on six land parcels totaling 620 lots with total acquisition and committed future development costs of $65 million. In addition to the properties subject to the land banking agreement, during the next six months, GSO and Hovnanian anticipate identifying other land parcels totaling up to an additional $60 million in acquisition and development costs to complete the initial land banking portfolio.
• In addition to the land banking arrangement, GSO agreed to increase their equity stake in Hovnanian by exchanging $15 million of Hovnanian's 2016 and 2017 Senior Unsecured Notes for 3,862,671 shares of Hovnanian's Class A common stock.

The stock was up today, but I think this is mainly good for the bondholders.

With the "land banking" arrangement, HOV gives up land from their inventory in exchange for cash, and is able to buy it back under some undisclosed terms. This is conceptually pretty similar to just borrowing money, and it's notable that the disclosure does not give enough information to figure out an implied interest rate or cost of borrowing these funds. If anything, the intelligence of the party on the other side of the trade would imply that HOV is getting a bad deal or at least expensive money.

Then, the other part of the transaction is just another debt/equity swap. It is great for the long debt short equity trade that they are doing those. The stock was probably worth about $10 million, meaning that the bondholders received about 66 cents for their bonds.