Tuesday, 5 March 2013

Vulture Fund

A vulture fund is a term commonly used to refer to a private equity or hedge fund that invests in debt issued by an entity that is considered to be very weak or dying, or whose debt is in imminent default. The name is a metaphor comparing these investors to vultures patiently circling, waiting to pick over the remains of a rapidly weakening company or, in the case of sovereign debt, debtor country. Market practitioners prefer to refer to them as distressed debt or special situations funds. Note that the debt condition involved is often a temporary or artificial distress situation and not necessarily one affecting long-term ability to repay earlier loans.
Vulture funds focused on debt target not only corporate obligers, but also sovereign debtor states. In the recent (2013) 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 resulted in the bonds' default in January 2002[1] . A single vulture fund run by Kenneth Dart, heir to the Dart Container fortune, claimed $700 million in a lawsuit against the government of Argentina [2] . Argentine investors were behind many of the secondary market purchases, however. Some estimate that in the debt exchange of 2005, Argentine bondholders controlled over half of the debt tendered. The reduction in principal that resulted from the restructuring led a significant minority of bondholders, including Dart, to become holdouts.
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[3] . 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 United States is K‑Mart, where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings[4] .


[edit] History

Sovereign debt collection was rare until the 1950s when sovereign immunity of government issuers was restricted[5]. This trend developed due to the long history of sovereign defaulting on commercial creditors with impunity. Accordingly sovereign debt collection actions began in the 1950s. One example was the freezing of Brazil's gold reserves held by the Federal Reserve[6] .
Investment in sovereign debt with the intent to recover was also restricted due to the laws of champerty and maintenance and by the fact that most sovereign debt was syndicated. Under the Doctrines of Champerty, it was illegal in England and the United States to purchase a debt with the sole intent of litigating it[7] . The distinction was made that if the debt was purchased to effect a recovery or facilitate investment, the doctrine was not a bar. Most jurisdictions have now eliminated the doctrine as archaic.
Similarly, sovereign debt owed to commercial creditors in the late 1980s was principally held by bank syndicates. This was the result of the petrodollar crisis of the 1970s when oil earnings were recycled into bank loans. The syndication of debt among banks made recovery impractical as a fund intending to litigate had to buy out the entire syndicate of holders or risk having the proceeds of litigation attached pursuant to sharing clauses in the loan agreements.
As the 1980s progressed, debt rescheduling efforts in Latin America created many new and easily traded instruments such as Brady bonds that brought new players into the market, including banks and hedge funds. The original creditors then wrote down their positions and sold the debt into the secondary market—a market consisting of banks and investment funds focused on buying at discounts to achieve above market returns on their investment.
In this process, much debt was repurchased and converted into local currency by the sovereign country issuers in official debt conversion programs designed to attract investment and in severely indebted countries through World Bank funded buy-backs. The result is that the old syndicates were broken up and many unrestructured syndicate "tails" were available for purchase at discounts exceeding 80% of principal face value. That pricing encouraged funds to invest in recovery actions, which would not otherwise make financial sense due to their length and cost.

[edit] Vulture Funds in Latin America

In 2001, when Argentina defaulted on roughly $81 billion, NML Capital, LTD., a hedge fund that is a subsidiary of Paul Singer's Elliott Management Corporation, purchased some of Argentina's debt on a secondary market for a price lower than the original amount. When Argentina defaulted, they restructured with some of their creditors in 2005 and 2010 for roughly $.30 on the dollar[8] . Led by NML Capital, the holdout creditors (including other hedge funds), rejected the proposal and sued Argentina for the full amount in New York State courts - thus, naming NML Capital a holdout vulture fund.
The main argument that NML Capital has been using in court is a "pari passu" clause that was in the original contractual agreement[9] . Pari passu is Latin for "on equal footing" which means that if Argentina pays back one creditor, they have to pay back all of the creditors, including ones that did not restructure. Since Argentina has already begun to repay the creditors that restructured, Elliot is arguing that they should be paid back.
Pari passu has been used by Elliot to litigate for other country's debt that they bought on secondary markets, another case being Peru. Paul Singer charged in 1995 $ 65 million to Republic of Perú with an inversion of just $ 5 million.[10] Besides, Kenneth B. Dart, who runs the vulture found Dart Management, claims $ 650 million in a lawsuit against Argentina[10] both Dart and Singer, among others, do not accepted the Argentine debt restructuring offers in 2005 and 2010 and represent the 7% percent of Bond holders.
Because of this, in the beginning of the case, Argentina asked the court for a declaration that the argument was not legally sound but the court did not make the declaration because Elliot said that they would not use the clause "at any time in the near or distant future."
In June, Elliot Management supported legislation in New York State Senate and Assembly which would have allowed the fund to pursue post-court judgment. Jubilee USA Network and American Jewish World Service came out against the legislation and mobilized New York State residents to stop the legislation. The legislation did not make it to a vote when the NY State Senate and Assembly ended their session.
On October 2, 2012, NML Capital Ltd., a vulture fund based in the Cayman Islands, which held Argentine debt not included in Argentine debt restructuring,[11] impounded the Libertad, an Argentine Navy training ship in Tema, Ghana. The court in Ghana held that Argentina had waived sovereign immunity when it contracted the sovereign debt being enforced.[12] NML is a subsidiary of Elliott Associates, a hedge fund based in New York City founded by Paul Singer. There is also some doubt that the ship could have been considered an otherwise immune military asset since part of its "good will" visits to Africa included commercial negotiations, which would have negated Argentine claims that the unarmed school-ship was purely military.
Then, Elliot made the pari passu argument and in November, the New York State court ruled in favor of the holdout creditors based on the clause and ordered Argentina to pay $1.3 billion on December 15, the same date they were to pay the creditors that restructured. Now, the appeals court has frozen the payout to hear new arguments on the case in the 2nd U.S. Circuit Court of Appeals in New York on February 27.
The Administration through the Justice Department has come out in support of Argentina arguing that a ruling against Argentina could make it difficult for countries in financial distress to get crucial debt swaps. In 2009, Jubilee USA Network worked with Members of Congress including Spencer Bachus, Maxine Waters, Barney Frank and Judy Biggert to introduce bipartisan legislation to stop vulture funds from making a profit off of poor countries. Similar legislation has passed in the United Kingdom, Belgium, the Jersey Isles and the Isle of Man. The International Monetary Fund and World Bank have noted that this kind of behavior threatens financial recovery in fragile economies.

[edit] Vulture Funds in Africa

It is the activities of American vulture funds in countries such as Zambia, Liberia, the Congo republics and other heavily indebted poor countries in Africa which have caused the most concern. In 2002 the British Chancellor (and later Prime Minister) Gordon Brown told the United Nations that it was "morally outrageous" and perverse that the vultures made vast profits by buying up the debts of these poor countries cheaply and then suing for ten or a hundred times what they paid for them.[13]
The IMF and World Bank agree that vultures endanger the gains made by debt relief to poorest countries "The Bank has already delivered more than $40 billion in debt relief to 30 of these countries...thanks to this, countries like Ghana can provide micro-credit to farmers, build classrooms for their children, and fund water and sanitation projects for the poor" wrote World Bank Vice President Danny Leipziger in 2007 "Yet the activities of vulture funds threaten to undermine such efforts" and he went on "the strategies adopted by vulture funds divert much needed debt relief away from the poorest countries on earth and into the bank accounts of the wealthy".[14]
It was the case of vulture fund Donegal International against Zambia in 2007 which focused these concerns[15] . Michael Sheehan who ran the fund and who apparently went by the name of "Goldfinger" bought an old Zambian debt from the 1970s for $3 million and sued for $55 million in the British courts. He was ultimately awarded $15 million.[16] A series of attempts was then made in Britain and the United States by organizations such as Oxfam and the Jubilee Debt Campaign to change the laws so that vultures would not be able to collect on their awards.[17]
In 2009 a British court awarded $20 million to vulture funds suing Liberia. Before the vultures could collect their money a Debt Relief (Developing Countries) Act 2010 was passed in the UK parliament in 2010 after the Liberian President and 2011 Nobel Peace Prize Winner Ellen Johnson Sirleaf appealed on the BBC Newsnight programme for the vultures to "have a conscience and give this country a break".[18]
That act caps what the vultures can collect—they had to settle with Liberia for just over $1 million—and effectively prevents them suing for exorbitant amounts of money in UK courts. Nick Dearden of the Jubilee Debt Campaign said of the change: "It will mean the poorest countries in the world can no longer be attacked by these reprehensible investment funds who grow fat from the misery of others." The law was made permanent in 2011 but there are still havens for this activity, such as Channel Islands and The British Virgin Isles.[19] Another vulture fund, FG Hemisphere of Brooklyn, sued Democratic Republic of Congo for a debt from Yugoslavia in the 1970s which it had picked up for just over $3 million.
FG sued in Hong Kong, Australia, and Jersey which was not covered by the UK law against vultures. The Chinese government blocked the attempt to sue in Hong Kong but the Jersey court awarded $100 million to FG. FG's owner Peter Grossman was doorstepped by freelance reporter Greg Palast and asked whether he thought it was fair to take $100 million for a debt he had paid $3 million for. He said "Yeah I do actually…I'm not beating up the Congo I'm collecting on a legitimate claim". He denied paying just $3 million for the debt but Newsnight said Bosnian police had shown them documents showing that the debt was sold to FG for $3.3 million of which more than half a million went to Michael "Goldfinger" Sheehan who had helped set up the deal.[20]
A series of attempts was then made in Britain and the United States by organizations such as Jubilee USA Network, Oxfam and the Jubilee Debt Campaign to change the laws so that vultures would not be able to collect on their awards. The Jubilee Debt Coalition is now calling on the Jersey government to ban vultures collecting there too and Jersey is consulting on making that change. Jubilee's Tim Jones went to Jersey in November 2011 to ask the government to ban vulture funds there too. He told The Guardian that the Democratic Republic of Congo "desperately needs to be able to use its rich resources to alleviate poverty, not squander them on paying unjust debts".[21]
Vulture Fund FG Hemisphere run by financier Peter Grossman is attempting to enforce an ICC arbitration award for $116 million owed by the Democratic Republic of Congo. The award was originally issued by an arbitral panel of the International Chamber of Commerce (ICC) in favor of Energoinvest DD of Bosnia in the amount of $39 million and then sold to FG Hemisphere[22] . The award was issued by the ICC in respect of unpaid construction contracts pursuant to which Energoinvest supervised construction of high-tension power lines for transmission of power from the Inga–Shaba dam in Congo; the power lines are still in service. Sales of assets by Energoinvest have been criticized by opposition parties in Bosnia as having been "an abuse of power" by the management who defend themselves on the basis that the company had to sell assets in order to pay salaries after it was impoverished and broken up in the break up of the former Yugoslavia.
Since acquiring the arbitration award, FGH has been engaged in a world wide campaign to enforce it by registering it as a judgment in jurisdictions in which it identifies assets of the Congo DRC. FGH has also been in settlement negotiations with Congo DRC for ten years offering discounts of as much as sixty percent of the award. Exasperated at its inability to settle the debt, FGH has resorted to enforcing its judgment rights, including in the courts of the United States, Hong Kong and now Jersey.
Although the World Bank and the development community used to favor debt for development conversions to resolve outstanding debts, they changed their policy on the issue in the 1990s when the World Bank's international development association arm decided to fund buy-backs with bilateral development assistance loans. In order to depress the price of the debtor country debts concerned, they strongly recommended to debtor governments that they refuse offers for inward conversion into local currency.
This policy of discouraging compromise on external debts owed by severely indebted lower income countries grew into the cancel the debt campaign championed by Oxfam and Jubilee. Accordingly, the collection of the Energo debt has been condemned by a broad range of NGOs. It has also been condemned by UNICEF, a UN agency that pioneered debt for development swaps with the World Wildlife Fund in the 1990s.

Grossman and other distressed debt investors have recently been targeted by the development community and the liberal press, including the BBC and Guardian news organizations with "name and shame campaigns" in order to try to influence the vote of the government of Jersey in considering anti-vulture legislation.
The anti-debt movement is now advocating that the debt of middle-income countries should also be forgiven. This is an argument which is not likely to be well received by European governments which are concerned by the prospect of a default by Greece on its external bonds.

[edit] See also

[edit] References

  1. ^ tong, Jennifer. [debt-trial-of-the-century-nml-capital-ltd-v-republic-of-argentina "Debt Trial of the Century: NML Capital, LTD. v. Republic of Argentina"]. Current. Web. debt-trial-of-the-century-nml-capital-ltd-v-republic-of-argentina. Retrieved 4 March 2013.
  2. ^ Rothe, Sean (13 February 2004). "Sqeezing Argentina". Buissness Observer. http://www.review.net/print/Squeezing-Argentina/. Retrieved 4 March 2013.
  3. ^ "A victory by default?". The Economist. 3 March 2005. http://www.economist.com/node/3715779. Retrieved 4 March 2013.
  4. ^ Hamilton, Walter (Jan 28, 2001). "For 'Vulture' Firms, It's the Best of Times; Investors who snap up assets, stock and debt of troubled companies are finding ripe pickings as the economy stumbles. They take big risks, but expect to earn high returns on bets others now shun.". Los Angeles Times. http://pqasb.pqarchiver.com/latimes/access/67391571.html?dids=67391571:67391571&FMT=ABS&FMTS=ABS:FT&type=current&date=Jan+28%2C+2001&author=WALTER+HAMILTON&pub=Los+Angeles+Times&desc=For+'Vulture'+Firms%2C+It's+the+Best+of+Times%3B+Investors+who+snap+up+assets%2C+stock+and+debt+of+troubled+companies+are+finding+ripe+pickings+as+the+economy+stumbles.+They+take+big+risks%2C+but+expect+to+earn+high+returns+on+bets+others+now+shun.&pqatl=google. Retrieved 4 March 2013.
  5. ^ Choi, Stephen; Mitu Gulati; Eric Posner (31). "The Evolution of Contractual Terms in Sovereign Bonds". Journal of Legal Analysis 4 (1): 131-179. http://jla.oxfordjournals.org/content/4/1/131.full. Retrieved 4 March 2013.
  6. ^ Szulu, Tad (15 July 1957). "HARD CURRENCIES SHORT IN BRAZIL; Nation Is Nearly Out of Such Reserves--Coffee Crop May Replenish Funds Debt Payments Due Reserves Were Low". The New York Times. http://select.nytimes.com/gst/abstract.html?res=F60E12FE3B5912718DDDAC0994DF405B8789F1D3. Retrieved 4 March 2013.
  7. ^ FEI NG, JERN. "The Role of the Doctrines of". Chartered Institute of Arbitors. http://clients.squareeye.net/uploads/essex2011/documents/JERN-FEI%20NG.pdf. Retrieved 4 March 2013.
  8. ^ Moffett, Mathew (April 16, 2010). "Argentina Releases Debt-Swap Details". Wall Street Journal. http://online.wsj.com/article/SB10001424052702303950104575185772669803524.html?mod=googlewsj. Retrieved 5 March 2013.
  9. ^ "The pari passu clause and the Argentine case". Overy andAllen Global Law Intelligence Unit. Web. http://www.allenovery.com/SiteCollectionDocuments/The%20pari%20passu%20clause%20and%20the%20Argentine%20case.pdf. Retrieved 5 March 2013.
  10. ^ a b "Quiénes son y cómo operan los hold outs especuladores". Mendoza Opina. October 29, 2012. http://mendozaopina.com/economia/23574-quienes-son-y-como-operan-los-hold-outs-especuladores. Retrieved November 2, 2012.
  11. ^ "Republic of Argentina v. NML Capital". Royal Courts of Justice. April 2, 2010. http://www.bailii.org/ew/cases/EWCA/Civ/2010/41.html. Retrieved October 19, 2012.
  12. ^ Emily Schmall (October 19, 2012). "Seizure of Ship From Argentina Forces Shake-Up". New York Times. http://www.nytimes.com/2012/10/19/world/americas/seizure-of-argentine-ship-forces-shake-up.html. Retrieved October 19, 2012.
  13. ^ http://webarchive.nationalarchives.gov.uk/+/http:// www.hm-treasury.gov.uk/speech_chex_100502.htm
  14. ^ http://www.dannyleipziger.com/documents/ LetsStopVultureFund.pdf
  15. ^ Dossani, Sameer (February 21, 2007). "Investors Aim to Profit from Zambia's Poverty". Foreign Policy In Focus. http://www.fpif.org/articles/investors_aim_to_profit_from_zambias_poverty. Retrieved 5 March 2013.
  16. ^ http://news.bbc.co.uk/1/hi/programmes/newsnight/6362783.stm
  17. ^ http://www.jubileedebtcampaign.org.uk New3720figures3720show3720extent3720of3720vulture3720fund3720threat+3685.twl
  18. ^ BBC News - UK stops 'vulture funds' picking on poor.
  19. ^ - Vulture funds – how do they work?
  20. ^ http://www.bbc.co.uk/news/business-15745003
  21. ^ http://www.guardian.co.uk/global-development/2011/nov/15/vulture-funds-jersey-decision
  22. ^ STEWART, HEATHER (8 AUGUST 2009). "Vulture fund swoops on Congo over $100m debt". THE GUARDIAN. http://www.mathaba.net/go/?http://www.guardian.co.uk/world/2009/aug/09/congo. Retrieved 5 March 2013.

[edit] External links

From Wikipedia, the free encyclopedia
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A vulture capitalist is an investor who used the clauses of the terms of an investment deal in a company to seize ownership of the company or valuable parts of it outright.[1][2] Whereas a venture capitalist invests in a company likely to succeed in the marketplace and hence show a profit to the investor, a vulture capitalist looks to invest in a firm likely to fail to show a profit in the near term, triggering the takeover clauses, resulting in forfeiture of some or all the assets of the company, with an eye towards selling off the constituent parts, hence showing a profit while destroying or hobbling the company.[1][2]

[edit] See also

[edit] References

  1. ^ a b Lux, John E. (2010). How to Pick Hot Reverse Merger Penny Stocks. Eagle Point Publishing. p. 159.
  2. ^ a b Goldstein, Arnold S. (August 23, 2002). "Dealing with Venture Capital Firms". Starting on a Shoestring: Building a Business Without a Bankroll. John Wiley & Sons. p. 150.

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