Lenders push for profits from insolvency
Hedge fund investors could trigger wave of bankruptcies as economy deteriorates, experts warn
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