Experts have warned that hedge funds, seeking to profit from the recession, could precipitate a run of bankruptcies in the coming months by buying up large amounts of the debt of struggling companies, according to The Guardian newspaper.
The Guardian claimed that pro-active lenders such as hedge funds or vulture funds, may buy debt of distressed companies at a heavy discount in order to profit from a potential insolvency, sale of assets or debt-for-equity swap that might give them control of the business.
This strategy is known as 'loan-to-own' and perpetrators are regarded as the 'something-for-nothing' community; investors who expect to make short-term profit from the misfortune of a business. There have been two very public examples of this recently. In the US, Barack Obama blamed hedge funds and 'speculators' for blocking a life-or-death bailout deal for Chrysler, which sent the carmaker into bankruptcy. And in the UK, Independent News & Media, publisher of the Independent newspaper, was in crisis with its future dependant on whether it could negotiate a standstill agreement with holders of euros 200m (£178m) of bonds that it could not afford to pay.
Head of European restructuring at accountants KPMG, Philip Davidson, was quoted in The Guardian as saying, “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! This will mostly come from small US funds.”
Date:26 June 2009
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