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A vulture fund is a
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
,
private-equity fund
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. ...
or
distressed debt Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding ...
fund, that invests in
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
considered to be very weak or in
default, known as
distressed securities Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding ...
.
Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to subsequently sell the debt for a larger amount than the purchasing price. Debtors include companies, countries, and individuals.
Vulture funds have had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before realizing the attachments in forced sales. Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance. In one instance involving
Peru
, image_flag = Flag of Peru.svg
, image_coat = Escudo nacional del Perú.svg
, other_symbol = Great Seal of the State
, other_symbol_type = Seal (emblem), National seal
, national_motto = "Fi ...
, such a seizure threatened payments to other creditors of the sovereign obliger.
History
Sovereign debt collection was rare until the 1950s when sovereign immunity of government issuers started to become restricted by contract terms. This trend developed from the long history of
sovereign default
A sovereign default is the failure or refusal of the
government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
ing on commercial creditors with impunity. Accordingly, sovereign debt collection actions began in the 1950s. One example was the freezing of
Brazil
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
's gold reserves held by the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
.
Investment in
sovereign debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit o ...
with the intent to recover was also restricted due to the laws of
champerty and maintenance
Champerty and maintenance are doctrines in common law jurisdictions that aim to preclude frivolous litigation:
*Maintenance is the intermeddling of a disinterested party to encourage a lawsuit. It is: "A taking in hand, a bearing up or upholdin ...
and by the fact that most sovereign debt was syndicated. Under the doctrine of champerty, it was illegal in
England
England is a country that is part of the United Kingdom. It shares land borders with Wales to its west and Scotland to its north. The Irish Sea lies northwest and the Celtic Sea to the southwest. It is separated from continental Europe b ...
and the United States to purchase a debt with the sole intent of litigating it. 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
Petrodollar recycling is the international spending or investment of a country's revenues from petroleum exports ("petrodollars"). It generally refers to the phenomenon of major petroleum-exporting states, mainly the OPEC members plus Russi ...
crisis
A crisis ( : crises; : critical) is either any event or period that will (or might) lead to an unstable and dangerous situation affecting an individual, group, or all of society. Crises are negative changes in the human or environmental affair ...
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
Latin America or
* french: Amérique Latine, link=no
* ht, Amerik Latin, link=no
* pt, América Latina, link=no, name=a, sometimes referred to as LatAm is a large cultural region in the Americas where Romance languages — languages derived f ...
created many new and easily traded instruments such as
Brady bonds
Brady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the late 1980s. The bonds were named after U.S. Treasury Secretary Nicholas Brady, who proposed a novel debt-reduction agreement for developing countries.
...
that brought new players into the market, including banks and
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
s. The original creditors then wrote down their positions and sold the debt into the secondary market, which is 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
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
funded buy-backs. The result is that the old syndicates were broken up and many unreconstructed syndicate "tails" were available for purchase at discounts exceeding 80% of the 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.
Corporation law and theory of finance
Businesses that need more capital than their founders can raise by personal contacts are enabled by this legal method of attracting investors to buy a portion of the business. Owners would invest capital and obtain
common stock
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Com ...
or equity in exchange for invested cash or other property like machines, factories, warehouses, patents or other interests. Then the owners would raise additional capital by borrowing from lenders in capital markets by selling bonds. In corporation law, the owners of these bonds come first in line for repayment so that if there is not sufficient funds to repay the bondholders, the stockholders get wiped out. The bondholders step into the shoes of the former shareholders. The shareholders own nothing because they, the owners, could not fully repay all the contractual promises, or loans. So like a bank (the mortgagee) that has lent money to a home buyer (the mortgagor) takes possession of the security (the home) when
mortgage
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
payments are not made (i.e.
foreclosure
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Formally, a mortg ...
), the bondholders of a corporation take possession of the business from the former owners (the shareholders) when the corporation falls into
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
. Thus, when shareholders cannot repay bondholders, in principle, bondholders become the new shareholders. In practice, however, it is more complicated.
In the financial markets, the bonds of troubled public companies trade in a manner similar to common stock of solvent companies.
Viewpoints
Term "vulture fund"
The term "vulture fund" is a
metaphor
A metaphor is a figure of speech that, for rhetorical effect, directly refers to one thing by mentioning another. It may provide (or obscure) clarity or identify hidden similarities between two different ideas. Metaphors are often compared wit ...
which is used to compare these particular hedge funds to the behaviour of
vultures
A vulture is a bird of prey that scavenges on carrion. There are 23 extant species of vulture (including Condors). Old World vultures include 16 living species native to Europe, Africa, and Asia; New World vultures are restricted to North and ...
(the birds of prey) “preying” on debtors in financial distress by purchasing the now-cheap credit on a secondary market to make a large monetary gain, in many cases leaving the debtor in a worse state. The term is often used to criticize the fund for strategically profiting from debtors that are in financial distress, and thus is frequently considered derogatory.
However financiers dealing with vulture funds argue that "their lawsuits force accountability for national borrowing, without which credit markets would shrivel, and that their pursuit of unpaid commercial debt uncovers public corruption."
A related term is "vulture investing", where certain stocks in near bankrupt companies are purchased upon anticipation of asset divestiture or successful reorganization.
The term has gained wide acceptance from governments, newspapers, academics and international organizations such as the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
,
Group of 77
The Group of 77 (G77) at the United Nations (UN) is a coalition of 134 developing countries, designed to promote its members' collective economic interests and create an enhanced joint negotiating capacity in the United Nations. There were 77 fou ...
,
Organisation of American States
The Organization of American States (OAS; es, Organización de los Estados Americanos, pt, Organização dos Estados Americanos, french: Organisation des États américains; ''OEA'') is an international organization that was founded on 30 April ...
and
Council on Foreign Relations
The Council on Foreign Relations (CFR) is an American think tank
A think tank, or policy institute, is a research institute that performs research and advocacy concerning topics such as social policy, political strategy, economics, mi ...
, among others.
Legislation
In 2009, bipartisan legislation in the
US Congress
The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washin ...
was introduced aimed to prevent vulture funds from profiting on defaulted sovereign debt by capping the amount of profit that a secondary creditor can win through litigation based on those debts. The Stop VULTURE Funds Act was introduced, but not passed, in the United States. A non-profit financial reform organization,
Jubilee USA Network
Jubilee USA Network is a nonprofit financial reform organization based in Washington D.C. Jubilee USA's work began in conjunction with the global Jubilee 2000 movement, founded in the late 1990s to advocate for debt relief for developing countri ...
, supported the legislation citing the impact that vulture funds have on poor countries. Similar legislation was passed in the United Kingdom,
Belgium, Jersey, the Isle of Man, Australia. The States of Guernsey debated legislation in 2012.
Financial institutions
The
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
and
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
noted that vulture funds endanger the gains made by
debt relief Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.
From antiquity through the 19th century, it refers to domestic debts, in particu ...
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
Ghana (; tw, Gaana, ee, Gana), officially the Republic of Ghana, is a country in West Africa. It abuts the Gulf of Guinea and the Atlantic Ocean to the south, sharing borders with Ivory Coast in the west, Burkina Faso in the north, and To ...
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... 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."
Governmental and non-governmental organisations
The conduct of the vulture funds blocking payments to other creditors to Argentina was denounced by the
Organisation of American States
The Organization of American States (OAS; es, Organización de los Estados Americanos, pt, Organização dos Estados Americanos, french: Organisation des États américains; ''OEA'') is an international organization that was founded on 30 April ...
, with the exception of the United States and Canada.
The
G77+China also criticised the funds and stated: "Some recent examples of the actions by vulture funds before international courts show their highly speculative nature. These funds pose a danger for all the future process of debt swaps, for developing countries and for developed nations as well".
The US-based
Council on Foreign Relations
The Council on Foreign Relations (CFR) is an American think tank
A think tank, or policy institute, is a research institute that performs research and advocacy concerning topics such as social policy, political strategy, economics, mi ...
questioned the US Supreme Court for rejecting Argentina's appeal in its legal dispute with the so-called vulture funds. The organization claimed that such actions make it "more difficult for countries to free themselves from the burden of over-indebtedness" and are " very bad for international capital markets", as well as being a huge blow to national sovereignty. The organization described
Thomas Griesa
Thomas Poole Griesa (October 11, 1930 – December 24, 2017) was a United States district judge of the United States District Court for the Southern District of New York from 1972 to 2017 and its Chief Judge from 1993 to 2000.
Education and care ...
's ruling against Argentina in favour of vulture funds as "punishing the innocent" and "turning the natural order of debt on its head".
United Kingdom
In 2002, the British Chancellor (and later Prime Minister)
Gordon Brown
James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party (UK), Leader of the Labour Party from 2007 to 2010. He previously served as Chance ...
told the
United Nations
The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and international security, security, develop friendly relations among nations, achieve international cooperation, and be ...
that when vulture funds purchase debt at a reduced price, and make a profit from suing the debtor country to recover the full amount owed, the outcome is "morally outrageous". Legislation passed in 2010 removed the ability of vulture funds to use UK courts to enforce contested debts.
United Nations
On 9 September 2014, the
United Nations General Assembly
The United Nations General Assembly (UNGA or GA; french: link=no, Assemblée générale, AG) is one of the six principal organs of the United Nations (UN), serving as the main deliberative, policymaking, and representative organ of the UN. Curr ...
voted to support a new bankruptcy process for sovereign nations, which would promote debt restructuring by excluding so-called "vulture funds" from the process. The vote was 124–11 in favor, with 41 abstentions. The United States voted against the measure.
Ireland
In October 2016, the Irish State closed tax
loophole
A loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system.
Originally, the word meant an arrowslit, a narrow verti ...
s that U.S.
distressed debt Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding ...
funds (labeled "vulture funds" in the Irish media),
advised by
IFSC tax-law firms (e.g.
Matheson),
had exploited to avoid Irish taxes (capital gain, withholding tax and VAT/duty)
on over €80 billion of Irish distressed assets.
The affair caused a national scandal in Ireland,
and led to public backlash against the activities of US
distressed debt Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding ...
funds,
and particularly when it was discovered that they had used children's charities controlled by Irish tax-law firms to mask their
Section 110 SPV
An Irish Section 110 special purpose vehicle (SPV) or section 110 company, is an Irish tax resident company, which qualifies under ''Section 110'' of the '' Irish Taxes Consolidation Act 1997'' (TCA) for a special tax regime that enables the ...
tax vehicles.
The Irish State did not prosecute the "vulture funds" for tax avoidance, and in February 2018 the
Central Bank of Ireland created a new structure the
L-QIAIF, which does not file public accounts, which was how the scandal was uncovered, into which the "vulture funds" transferred over €55 billion of assets (one-quarter of Irish 2018
GNI*).
On 28 December 2018, the Irish
Taoiseach
The Taoiseach is the head of government, or prime minister, of Republic of Ireland, Ireland. The office is appointed by the president of Ireland upon the nomination of Dáil Éireann (the lower house of the Oireachtas, Ireland's national legisl ...
,
Leo Varadkar
Leo Eric Varadkar ( ; born 18 January 1979) is an Irish politician who has served as Taoiseach since December 2022, and previously from 2017 to 2020. He served as Tánaiste and Minister for Enterprise, Trade and Employment from June 2020 to De ...
, praised the activity of "vulture funds" in Ireland to the ''
Irish Times
''The Irish Times'' is an Irish daily broadsheet newspaper and online digital publication. It launched on 29 March 1859. The editor is Ruadhán Mac Cormaic. It is published every day except Sundays. ''The Irish Times'' is considered a newspaper ...
'' newspaper.
See also
*
Collateralized debt obligation
A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Lepke ...
References
External links
* Complicating the Morality Play on Vulture Funds (Corrected Story), Christopher Faille, Senior Financial Correspondent, Hedgeworld News, Monday, 4 February 2008
Distressed Debt Returns to the SpotlightFTfm, 30 July 2007
Cerebral Fund
Jubilee Debt Campaign action on vulture funds
Investopedia: vulture fund by
Anne Krueger
Anne Osborn Krueger (; born February 12, 1934) is an American economist. She was the World Bank Chief Economist from 1982 to 1986, and the first deputy managing director of the International Monetary Fund (IMF) from 2001 to 2006. She is current ...
Economics of Vulture Funds -Ft.com
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"Investigative Journalist Greg Palast Tracks Vulture Funds Preying on African Debt- video report by ''
Democracy Now!
''Democracy Now!'' is an hour-long American TV, radio, and Internet news program hosted by journalists Amy Goodman (who also acts as the show's executive producer), Juan González, and Nermeen Shaikh. The show, which airs live each weekday at ...
''
{{hedge funds
Debt
Investment funds
Private equity
Pejorative terms