International Finance
Finance Wealth Management

Vulture Funds Threat to HIPC

The term “vulture fund” refers to a hedge fund that seeks to profit by buying up the distressed debt on secondary markets at a below par price, and then trying to recover ten times the purchase price, often by suing in U.S. or European courts. 26th August 2013 Last month, two hedge funds took a controlling stake in part of the Co-operative Bank’s Debt.  Aurelius...

The term “vulture fund” refers to a hedge fund that seeks to profit by buying up the distressed debt on secondary markets at a below par price, and then trying to recover ten times the purchase price, often by suing in U.S. or European courts.

26th August 2013

Last month, two hedge funds took a controlling stake in part of the Co-operative Bank’s Debt.  Aurelius Capital Management and Silver Point Capital have built stake in one part of the bank’s loans, putting them in a strong position as the lender works to fill a £ 1.5 billion capital hole. Argentina did settle with the vast majority of bond holders but the vulture funds that bought funds for pennies on the dollar from a small minority of the bondholders used their immense influence on American politicians – to whose campaigns and political organisations they contribute generously to stop both the IMF and the U.S. Treasury from filing opinions adverse to their interests with the U.S. Supreme Court. To their advantage, the U.S. Supreme Court affirmed the prior decisions of the lower courts will stand in place for all future sovereign debt negotiations in the hands of a powerful and wealthy vulture fund speculators, these vested interests use any measure to force governments to pay them vast sums, even if it is against the national interests.

In 1999, a vulture fund called Donegal International bought a debt owned by Zambia for a knockdown price of $ 3.3 million. Most of Zambia’s debt was cancelled and the country began to save $ 40 million a year when they stopped paying loans to the IMF and the World Bank. After Zambia received this debt relief, Donegal sued the African Nation for $ 55 million and in April 2007, the court ruled that Zambia must pay $ 15.4 million, 65 percent of the debt relief that was specifically directed for development projects. It was a huge profit for the vulture fund and a theft from the poorest Zambians. The U.K Royal Court of Justice in London ruled that Zambia must pay $ 15.4 million and also a share of legal costs to Donegal International, which had sued the African nation for payment of funds.

What is Vulture Fund?

Academicians and financial experts describe vulture funds “as funds that pounce on a state like Vulture on a rotting carcass”. The term “vulture fund” refers to a hedge fund that seeks to profit from by buying up the distressed debt on secondary markets  at a below par price and then trying to recover ten times the purchase price, through suing them legally in European and American courts. These hedge funds are usually secretive and operate from offshore tax havens like the Cayman Islands. The ownership of these hedge funds are not divulged in most of the cases and are owned by billionaires from America and other countries, vulture funds target cheap debt of poor countries or countries under financial distress. These funds track the debt relief process, buy debt of nations about to get debt relief and then sue the country after it has received a windfall of resources thanks to debt cancellation.

Champerty

The vulture funds grind down   poor countries in cycles of litigation, commonly known as “champerty”, the litigation is usually protracted with many law suits taking three to ten years to settle. These vulture funds have won most of their law suits with a success rate of 72 percent, yielding more than $ 1 billion. The IMF reported that in some cases the claims by vulture funds constitute as much as 12 to 13 percent of a nation’s GDP, the litigation costs are a huge burden for the countries already under huge debt, causing inequitable sharing burden among creditors. Some of the countries affected by these wealthy hedge funds are Congo, Cameroon, Angola, Liberia, Tanzania and Uganda.

“Parri Passu”

One of the primary reasons why vulture funds are successful is because courts have been willing to enforce their right to collect their full value of debt. One of the most successful arguments is the inclusion of a clause called “parri passu” in many sovereign debt agreements; it is a common agreement between joint lenders under which, in the event of a shortfall, they agree to share whatever is available.

For example: when company “Y” goes into dissolution, the assets over which the charge has been created will be distributed in the proportion to the creditor’s respective holdings. Therefore, if the Bank “X” has tendered a loan facility of 60 million and another creditor “Z” has tendered 40 million, the recovery after selling assets of company “Y” to which parri passu charge has been attached, shall be distributed in the ratio of 6:4 among “X” and “Z”. The parri passu charge will have a huge effect on the countries due to two reasons:

  1. Creditors can collect the full value of the debt
  2. Restructuring which is a vital process for debt ridden countries will be stopped by the courts under the “parri passu” argument.

France files “Amicus Brief” 

A state run agency in Argentina reported last week that France submitted an ‘amicus brief ” to the court in favour of June 24th petition before the Supreme Court. Argentina is asking the Supreme Court to ‘void’ the second U.S. Circuit Court of Appeals ruling last October that issued orders to the South American country to pay more than $ 1.3 billion to hedge funds that are suing for full repayment on defaulted bonds. The holdout creditors are demanding 100 cents on the dollar in a case that will end up before the U.S. Supreme Court, if the court accepts Argentina’s petition to hear the case.

Amicus Brief is a document that is filed in a court by a party who is not directly related to the case under consideration, States and Governments may also step in if they believe a case may impact them.

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