Lenders push for profits from insolvency

Experts are warning that hedge funds could force waves of bankruptcies in the months ahead as they seek to profit from the recession by buying up large amounts of debt of struggling companies, The Guardian reported.

Activist lenders, including hedge funds or vulture funds, buy debt of distressed companies at a heavy discount to profit from a potential insolvency, a sale of assets or a debt-for-equity swap that would give them control of the business - a strategy called 'loan-to-own', The Guardian said.

They are sometimes known as the 'something-for-nothing' community, or investors who expect to profit from the misfortune of a business. Last week, Barack Obama blamed hedge funds and 'speculators' for blocking a life-or-death bailout deal for Chrysler, which sent the carmaker into bankruptcy.

In Britain, Independent News & Media, publisher of the Independent newspaper, said last week that its future depended on whether it could negotiate a standstill agreement with holders of euros 200m (£178m) of bonds, which mature on 18 May and that it cannot afford to pay.

Philip Davidson, head of European restructuring at accountants KPMG, told The Guardian: 'Hedge funds that buy into problem situations are less nervous about using insolvency to crack value out of a situation than bank lenders. We haven't seen loan-to-own becoming loan-to-bust yet, but I'd be astonished not to see this in the next 12 months - mostly from small US funds.'

Lenders push for profits from insolvency