Vulture fund
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As the name suggests, these funds are metaphorically like circling vultures patiently waiting to pick over the remains of a rapidly weakening company or, in the case of sovereign debt, debtor. Market practitioners prefer to refer to them as distressed debt or special situations funds. As the name suggests, these funds are metaphorically like circling vultures patiently waiting to pick over the remains of a rapidly weakening company or, in the case of sovereign debt, debtor. Market practitioners prefer to refer to them as distressed debt or special situations funds.
Vulture funds focused on debt target not only corporate obligers, but also sovereign debtor states. In the recent case of Argentina, for example, vulture funds bought up a significant portion of the country's external public debt at very low prices (sometimes only 20% of their nominal value), and then attempted to cash them when the Argentine economic crisis exploded in 2002. A single vulture fund run by Kenneth B. Dart, heir to the Dart Container fortune, claimed 700 million USD in a lawsuit against the government of Argentina. It should be noted, however, that Argentina itself was behind many of the secondary market purchases. Some estimate that in the debt exchange of 2005, Argentina controlled over half of the debt tendered. It is likely that officials in the Argentine government benefited financially from these transactions.
Vulture funds have sometimes had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before actually realizing the attachments in forced sales. In one instance involving Peru, such a seizure threatened payments to other creditors of the sovereign obliger. Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance. A related term is "vulture investing", where certain stocks in near bankrupt companies are purchased upon anticipation of asset divestiture or successful reorganization. A prime example in the U.S. is K-Mart, where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings.
[edit] References
- *Complicating the Morality Play on Vulture Funds (Corrected Story),Christopher Faille, Senior Financial Correspondent, Hedgeworld News,Monday, February 4, 2008, - *Distressed Debt Returns to the Spotlight FTfm,30 July 7, - *In Defense of Vulture Funds - * Jubilee Debt Campaign action on vulture funds - * 19 June 2007 The Debt Frenzy - *Investopedia: vulture fund - *Should Countries like Argentina be able to Declare Themselves Bankrupt?, by Anne Krueger - *Economics of Vulture Funds -Ft.com - * - Federico Sturtzenegger and Jeromin Zettelmeyer “Has the Legal Threat to Sovereign Debt Restructuring Become Real?”, John F. Kennedy School of Government, Harvard, Working Paper, December, 2005 - * - August, 2003, Manmohan Singh, IMF Working Paper WP/03/161; "Recovery Rates from Distressed Debt - Empirical Evidence from Chapter 11 Filings, International Litigation and Recent Sovereign Debt Restructurings"
