Vulture fund

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A vulture fund is a private equity or hedge fund that invests in debt considered to be very weak or in imminent default.[1] Investors in the fund profit by buying debt at a discounted price on a secondary market and then suing the debtor for a larger amount than the purchasing price. Debtors can include companies, countries or individuals.

The term is a metaphor used to compare the fund to the behavior of vulture birds “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 off of debtors that are in financial distress, and thus is frequently considered derogatory.[2][3][4] 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."[5]

Vulture funds have sometimes had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before actually realizing the attachments in forced sales. In one instance involving Peru, such a seizure threatened payments to other creditors of the sovereign obliger.[6][7] Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance. A related term is "vulture investing", where certain stocks in near bankrupt companies are purchased upon anticipation of asset divestiture or successful reorganization.


Sovereign debt collection was rare until the 1950s when sovereign immunity of government issuers was restricted.[8] This trend developed due to the long history of sovereign defaulting on commercial creditors with impunity. Accordingly sovereign debt collection actions began in the 1950s. One example was the freezing of Brazil's gold reserves held by the Federal Reserve.[9]

Investment in sovereign debt with the intent to recover was also restricted due to the laws of champerty and maintenance and by the fact that most sovereign debt was syndicated. Under the Doctrines of Champerty, it was illegal in England and the United States to purchase a debt with the sole intent of litigating it.[10] 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 crisis 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 created many new and easily traded instruments such as Brady bonds that brought new players into the market, including banks and hedge funds. 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 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.


Hedge funds[edit]

Paul Singer's Elliott Management Corporation stated that they are bondholders with the law on their side, seeking only repayment of debts voluntarily entered into by Argentina.[11]

The hedge funds argued that they serve a needed function by pinpointing the cost of corruption to an indebted country's citizens. Elliott suggested that Argentinians would not need to suffer and the country would not have to default, if assets hidden from creditors could be recovered, such as businessmen with close ties to the government who have been accused of embezzling public funds. NML Capital, a subsidiary of Elliott Management Corporation, was quoted as saying "We share a common interest with the Argentine people in identifying and recovering stolen state funds." Singer says that countries should honour their debts, rather than blaming bondholders, as failure to pay debts suggests wider government corruption that is likely to be harming citizens. [2]


In 2009, bipartisan legislation in the US Congress 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[12] was supported by Rep. Maxine Waters (D-CA), Rep. Spencer Bachus (R-AL), Rep. Barney Frank (D-MA) and Rep. Judy Biggert (R-IL). A non-profit financial reform organization, Jubilee USA Network, supported the legislation citing the impact that vulture funds have on poor countries.[13] Similar legislation was introduced in the United Kingdom,[14] Belgium,[15] Jersey,[16] the Isle of Man,[17] Australia,[18] Guernsey,[19] and France.[citation needed]

International financial institutions[edit]

The International Monetary Fund and World Bank noted that vulture funds endanger the gains made by debt relief 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 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."[20]

See also Argentine debt restructuring

United Kingdom[edit]

In 2002, the British Chancellor (and later Prime Minister) Gordon Brown told the United Nations 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".[21]

Vulture funds in Latin America[edit]


In 2001, Argentina defaulted on roughly $81 billion. NML Capital, LTD., a hedge fund that is a subsidiary of Elliott Management Corporation, purchased Argentine debt on a secondary market for a price lower than the original amount. Ninety-two percent of creditors restructured in 2005 and 2010 for roughly $.30 on the dollar.[22] NML Capital rejected the proposal and sued Argentina for the full amount in New York State courts.

The main argument that NML Capital has been using in court is a "pari passu" clause that was in the original contractual agreement.[23] Pari passu is Latin for "on equal footing", which means that if Argentina pays back one creditor, they have to pay back all of the creditors, including those that did not restructure. Since Argentina has already begun to repay the creditors that restructured, Elliot argued that they should be paid back.

In June 2012, Elliot Management supported legislation in New York State Senate and Assembly which would have allowed the fund to pursue post-court judgment. Two poverty alleviation organizations, Jubilee USA Network and American Jewish World Service, came out against the legislation citing the negative impacts that vulture funds have on struggling countries.[24] The legislation did not make it to a vote when the New York State Senate and Assembly ended their session.

On October 2, 2012, NML Capital Ltd., a vulture fund based in the Cayman Islands, which held Argentine debt not included in Argentine debt restructuring,[25] impounded the Libertad, an Argentine Navy training ship in Tema, Ghana. The court in Ghana held that Argentina had waived sovereign immunity when it contracted the sovereign debt being enforced.[26]

Elliot made the pari passu argument and in November 2012, the New York State court ruled in favor of the holdout creditors based on the clause and ordered Argentina to pay $1.3 billion on December 15, the same date they were to pay the creditors that restructured. The appeals court heard oral arguments on February 27. In June 2014, the U.S. Supreme Court rejected Argentina's appeal of the ruling.[27]

The Center for Economic and Policy Research reported on the special meeting of Organization of American States foreign ministry officials, which was held July 3, 2014 in Washington, D.C. to discuss the situation with Argentina and the vulture funds. The meeting passed a resolution expressing:

1. Its support to the Argentine Republic so that it can continue to meet its obligations, pay its debt, honor its financial commitments and through dialogue arrive at a fair, equitable and legal arrangement with 100% of its creditors.

2. That it is essential for the stability and predictability of the international financial architecture to ensure that agreements reached between debtors and creditors in the context of sovereign debt-restructuring processes are respected by allowing that payment flows are distributed to cooperative creditors in accordance with the agreement reached with them in the process of consensual readjusting of the debt.

3. Its full support to achieving a solution that seeks to facilitate the broad Argentine sovereign debt-process.

All OAS member states supported the resolution with the exception of the U.S. and Canada.[28]


In 1983, Peru was in economic distress and had large amounts of external debt. In 1996, the nation restructured its debts. Original loans were exchanged for Brady Bonds, tradable bonds issued in the original amount of the loans.

Elliott Associates, a New York-based hedge fund owned by Paul Singer, purchased $20.7 million worth of defaulted loans made to Peru for a discounted price of $11.4 million. Elliott Associates, holding the only portion of Peru's debt remaining outside the restructure, sued Peru and won a $58 million settlement, a 400% return.

Peru, unable to pay the $58 million, continued to repay creditors that held Brady Bonds. Elliot filed an injunction to prevent Peru from paying off its restructured debt without also paying Elliott. It was argued that Peru violated the "pari passu" clause, which states that no creditor can be given preferential treatment.

Vulture funds in Africa[edit]

According to the African Development Bank Group, at least twenty heavily indebted poor African countries have been threatened with or subjected to legal actions by commercial creditors and vulture funds since 1999. Examples include Sierra Leone by Greganti Secondo and ARCADE, and Cote d'Ivoire and Burkina Faso by Industrie Biscoti. Other RMCs that have been targeted include Angola, Cameroon, Congo, Democratic Republic of the Congo, Ethiopia, Liberia, Madagascar, Mozambique, Niger, Sao Tome and Principe, Tanzania and Uganda.[29]


In 1999, Donegal International purchased $40 million worth of Zambia debt owed to Romania for the "discounted purchase price" of $3.2 million. In 2007, a British high court granted the company "permission to enforce a claim for tens of millions of dollars against the Government of Zambia." OXFAM, the World Bank and Jubilee USA, to name a few aid and development organizations, have spoken out against Donegal's purchase of the Zambian debt. Noted by Brian Finlay in July of 2007, "Such egregious practices should be prevented. But more often than not, these cases are the exception rather than the rule."[30]


In 2009, a British court awarded $20 million to vulture funds suing Liberia. Before the vultures could collect their money, the Debt Relief (Developing Countries) Act 2010[31] was passed in the UK parliament in 2010 after Liberian president and 2011 Nobel Peace Prize winner Ellen Johnson Sirleaf appeared on the BBC Newsnight program for the vultures to "have a conscience and give this country a break".[32]

That act caps what the vultures can collect, they had to settle with Liberia for just over $1 million, and effectively prevents them suing for exorbitant amounts of money in United Kingdom courts. Nick Dearden of the Jubilee Debt Campaign said of the change, "It will mean the poorest countries in the world can no longer be attacked by these reprehensible investment funds who grow fat from the misery of others." The law was made permanent in 2011 but there are still havens for this activity, such as the Channel Islands and The British Virgin Isles.[33]


Another vulture fund, FG Hemisphere of Brooklyn, sued Democratic Republic of Congo for a debt from Yugoslavia in the 1970s which it had picked up for just over $3 million. FG sued in Hong Kong, Australia, and Jersey which was not covered by the UK law against vultures. The Chinese government blocked the attempt to sue in Hong Kong but the Jersey court awarded $100 million to FG. FG's owner Peter Grossman was doorstepped by freelance reporter Greg Palast and asked whether he thought it was fair to take $100 million for a debt he had paid $3 million for. He said "Yeah I do actually…I'm not beating up the Congo. I'm collecting on a legitimate claim". A series of attempts were then made in Britain and the United States by organizations such as Jubilee USA Network, Oxfam and the Jubilee Debt Campaign to change the laws so that vultures would not be able to collect on their awards. The Jubilee Debt Coalition is now calling on the Jersey government to ban vultures collecting there too and Jersey is consulting on making that change. Jubilee's Tim Jones went to Jersey in November 2011 to ask the government to ban vulture funds. He told The Guardian that the Democratic Republic of Congo "desperately needs to be able to use its rich resources to alleviate poverty, not squander them on paying unjust debts".[34]

Vulture Fund FG Hemisphere run by financier Peter Grossman is attempting to enforce an ICC arbitration award for $116 million owed by the Democratic Republic of Congo. The award was originally issued by an arbitral panel of the International Chamber of Commerce (ICC) in favor of Energoinvest DD of Bosnia in the amount of $39 million and then sold to FG Hemisphere.[35] The award was issued by the ICC in respect of unpaid construction contracts pursuant to which Energoinvest supervised construction of high-tension power lines for transmission of power from the Inga–Shaba dam in Congo; the power lines are still in service. Sales of assets by Energoinvest have been criticized by opposition parties in Bosnia as having been "an abuse of power" by the management who defend themselves on the basis that the company had to sell assets in order to pay salaries after it was impoverished and broken up in the break up of the former Yugoslavia.

See also[edit]


  1. ^ Blackman, Jonathan I.; Mukhi, Rahul (2010). "The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna". Law and Contemporary Problems 73: 47–61. Retrieved 2014-07-19. 
  2. ^ Pesendorfer, Dieter. (2012). "Good-Bye Neoliberalism? Contested Policy Responses to Uncertain Consequences of the 2007-2009 Financial Crisis". In Alexander, Kern; Dhumale, Rahul. Research Handbook on International Financial Regulation. Cheltenham: Edward Elgar. p. 426. Retrieved 2014-07-19. 
  3. ^ Moles, Peter; Terry, Nicholas (June 10, 1999). The Handbook of International Financial Terms. Oxford University Press. ISBN 9780191727245. Retrieved 21 July 2014. 
  4. ^ Cone, Sydney (Fall 2010). "The International Review". New York Law School 13 (1): 17. Retrieved 22 July 2014. 
  5. ^ Moore, Jina (22 March 2014). "The end of vulture funds?". AlJazeera. Retrieved 19 July 2014. 
  6. ^ Ebrahimi, Helia; Blackden, Richard (2011-04-24). "Paul Singer's Elliott Management takes the fight to National Express". The Daily Telegraph. Retrieved 2014-07-21. 
  7. ^ "A victory by default?". The Economist. 3 March 2005. Retrieved 4 March 2013. 
  8. ^ Choi, Stephen; Mitu Gulati; Eric Posner (31). "The Evolution of Contractual Terms in Sovereign Bonds". Journal of Legal Analysis 4 (1): 131–179. Retrieved 4 March 2013. 
  9. ^ Szulu, Tad (15 July 1957). "HARD CURRENCIES SHORT IN BRAZIL; Nation Is Nearly Out of Such Reserves--Coffee Crop May Replenish Funds Debt Payments Due Reserves Were Low". The New York Times. Retrieved 4 March 2013. 
  10. ^ FEI NG, JERN. "The Role of the Doctrines of". Chartered Institute of Arbitors. Retrieved 4 March 2013. 
  11. ^ "Why Argentina's Rulers and Cronies Are Fair Game | Patricia Adams". Retrieved 2014-07-28. 
  12. ^ "The Stop VULTURE Funds Act". 2008-08-01. Retrieved 2014-07-28. 
  13. ^ "Vulture Funds: A Threat to the Poorest Countries and U.S. Foreign Assistance". Jubilee USA. June 2009. Retrieved 23 July 2014. 
  14. ^ Wray, Richard (8 April 2010). "Bill to stop vulture funds using UK courts gets royal assent". The Guardian (London). 
  15. ^ Wray, Richard (11 April 2010). "Parliament's last virtuous act: to stop vulture funds picking off the poor". The Guardian (London). 
  16. ^ "Jersey law to stop 'vulture funds' comes into force". BBC News. 1 March 2013. 
  17. ^ [1][dead link]
  18. ^ 11:06 (2012-06-25). "ParlInfo - Federation Chamber : PRIVATE MEMBERS' BUSINESS : Heavily Indebted Poor Countries Initiative". Retrieved 2014-07-28. 
  19. ^ "Guernsey government targets 'vulture funds'". BBC News. 20 October 2012. 
  20. ^ "Fonds vautours contre pays pauvres : 26 June 2007". Retrieved 2013-10-15. 
  21. ^ "[ARCHIVED CONTENT] Speech by the Chancellor of the Exchequer, Gordon Brown, at the United Nations General Assembly Special Session on children, New York - HM Treasury". Retrieved 2013-10-15. 
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  23. ^ "The pari passu clause and the Argentine case". Overy andAllen Global Law Intelligence Unit. Web. Retrieved 5 March 2013. 
  24. ^ "Argentina Takes on Vulture Funds in "Debt Trial of the Century"". Yes!. 22 April 2013. Retrieved 18 December 2013. 
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  26. ^ Emily Schmall (October 19, 2012). "Seizure of Ship From Argentina Forces Shake-Up". New York Times. Retrieved October 19, 2012. 
  27. ^ Argentina makes debt case in US newspapers AFP wire, June 23, 2014
  28. ^ Main, Alexander, U.S. on Its Own, Once Again, at OAS Meeting on Argentinean Sovereign Debt, CEPR website, July 9, 2014
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  30. ^ Finlay, Brian (July 2nd, 2007). "Taming The Vulture: Turning Distressed-Debt Investors Into Agents Of Social Change". Stimson. Retrieved 25 July 2014. 
  31. ^ "Debt Relief (Developing Countries) Act 2010" (PDF). Retrieved 2014-07-28. 
  32. ^ Jones, Meirion (2010-04-08). "Newsnight - UK stops 'vulture funds' picking on poor". BBC News. Retrieved 2013-10-15. 
  33. ^ "Vulture funds – how do they work? | Global development". London: The Guardian. 15 November 2011. Retrieved 2013-10-15. 
  34. ^ Palast, Greg; O'Kane, Maggie; Madlena, Chavala (15 November 2011). "Vulture funds await Jersey decision on poor countries' debts | Global development". The Guardian (London). Retrieved 2013-10-15. 
  35. ^ STEWART, HEATHER (8 August 2009). "Vulture fund swoops on Congo over $100m debt". THE GUARDIAN. Retrieved 5 March 2013. 

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