Felix Salmon

Vulture funds in distress

Felix Salmon
Feb 24, 2011 01:25 UTC

Playboy has long mixed its girlie pics with serious journalism, but it’s not always obvious why. Take the December 2010 issue, for instance. It includes a fantastic investigative piece on vulture funds by Aram Roston, which isn’t advertised on the cover and which wasn’t placed online either until I found out about it a few days ago and started nudging them.

In any case, all’s well that ends well: the story’s up now. It suffers from the same problem that bedevils all investigative features on vulture funds: for all that such people will talk to trade journalists and vulture-fund apologists like myself (although even I have difficulty talking to them), they’ll very rarely talk to anyone doing this kind of piece. Roston talked to one vulture on the record — Hans Humes — and includes a number of anonymous quotes as well, although some of the anonymous quotes are certainly from Humes as well. The result is necessarily one-sided, although not remotely as bad as other articles I might mention, and the real fault here lies with the vultures, rather than with the reporter.

What Roston has done is look into the early history of vulture funds — Ken Dart vs Brazil, Jay Newman vs Panama — in a way I haven’t seen elsewhere. This history is hard to dig up: he clearly knows what he’s talking about. I have quibbles — I always thought that Elliott Associates successfully lobbied in Albany to change the law about calculating compound interest, rather than unsuccessfully lobbying to change the law about champerty. But these things are minor. What’s impressive is some of the color that Roston has dug up around the way that Elliott works:

Newman tried to freeze, attach or seize anything belonging to the government of the Congo. The government tried to keep a step ahead of him, allegedly resorting to fraud or straw owners to keep its oil revenue out of the vultures’ talons.

The vultures set up an intelligence operation to gather information and pursue allegations of corruption against the Congo. Newman supposedly set up an operation in London to conduct private investigations.

One vulture fund investor described the cloak-and-dagger operations. “Think Casablanca,” he said. He told me an “information bazaar” tried to dig up dirt on the leaders of Congo-Brazzaville, and former CIA station chiefs cooperated. “They’re all former spooks,” he told me. “Senior guys, station chiefs.”

Their operator was proud of what he’d accomplished in gathering information about Congolese corruption, but he marveled at the cost of digging up the dirt. “This piece of information, $50,000.” He held out one hand as he said it. “This piece of information, $100,000.” He held out the other hand…

The country settled with most of the aggressive vulture funds at 55 cents on the dollar, but Newman and his financier at Elliott scored better than the others. Apparently by agreeing to stop providing reporters with negative information about the ruling family, Newman is said to have collected about $90 million from the Congo. He had paid less than $20 million for the old debt. His biggest cost may have been for lawyers, private eyes and lobbyists.

You can see how Elliott’s investors love this: it’s the very definition of uncorrelated returns.

Roston quotes one anonymous vulture as defending his work on the grounds that vultures expose corruption. That’s pretty weak, as even Humes admits. The reasons to admire vultures are a bit more subtle than that: their existence reassures big institutional bond investors that their will always be a bid for their paper, and thereby reduces sovereigns’ borrowing costs. Or to put it more generally, someone has to be willing able to enforce a legally-binding contract in a court of law. Otherwise, no one will buy any bonds at all, given that they’re nothing but legal contracts. (For a much longer defense of vulture funds, check out my 2007 post here.)

Roston also fails to note that while the profits in vulture investing can be enormous when it works, the losses can be even bigger when it doesn’t work. What he describes as “the vultures’ biggest play of all” — Argentina — has been an unmitigated disaster for the vultures, who are happily racking up legal fees and court judgments in New York, none of which make them any money at all, even as the bondholders who accepted Argentina’s exchange offer have seen their new bonds soar in value. At this point, it’s pretty much unthinkable that the holdout vultures will ever end up making more money off Argentina than they would have done if they’d just accepted Argentina’s initial offer. And to date, of course, they’ve received nothing. More generally, the total profits of all vulture funds ever remain a rounding error in the history of sovereign debt flows — it’s important to keep these things in perspective, and to remember that profits in some countries have to be offset by losses in other countries which never paid out.

Roston’s conclusion — that vultures will be with us always — is less hopeful than my view that a consensus is forming between people who used to be very far apart, and that the vulture-fund debate is slowly fading into irrelevance and anachronism. Certainly the Argentine elephant is going to remain in the room for the foreseeable future — and now, of course, there’s a very real risk that we’ll see the whole thing kicked up a few orders of magnitude if eurozone sovereigns get into the sovereign-default game. But for the time being the European Central Bank is doing a great job of keeping distressed sovereign debt out of the hands of potential litigants.

One vulture investor recently moaned to me that there was nothing to invest in, these days, what with all asset prices going through the roof. Maybe the thing which really kills vultures isn’t legislation from the likes of Maxine Waters, but rather ultra-loose monetary policy and quantitative easing. Vultures profit from distress; they tend to drown, rather, in liquidity.

Ivory Coast’s bond exchange gets it exactly right

Felix Salmon
Apr 12, 2010 18:54 UTC

It’s sheerest coincidence that the UK’s new anti-vulture-funds law came into force just as the Ivory Coast was concluding its astonishingly successful debt swap. The Republic took all of its six defaulted Brady bonds, and swapped them for one brand-new $2.3 billion global bond due in 2032. And it got well over 99% of bondholders to tender their bonds into the exchange: this has to count as one of the most successful sovereign distressed-debt exchanges ever.

Part of the reason it was a success is that the haircut is quite low, at just 20% of the principal amount outstanding: if you tendered a defaulted bond with a face value of $1,000, you got in return a performing bond with a face value of $800. That’s quite a good deal, even if the coupon on the new bonds is quite low in the early years: it starts at 2.5%, and steps up to 5.75% in 2013.

Another reason is the relatively small number of creditors: although these were technically bonds which could be owned by anyone, in practice the bondholders were just a few dozen banks and hedge funds who could be invited around a table into London Club negotiations.

But also the hedge funds involved knew full well that a holdout strategy was very unlikely to work, especially once take-up of the offer reached a critical mass. As part of the bond exchange, the holders of the old bonds voted to strip away their waiver of sovereign immunity, meaning that it would be essentially impossible to take Ivory Coast to court in an attempt to collect on the defaulted debt.

One interesting aspect of the Ivorian exchange is that it took place exactly along the lines of the new UK law: essentially the London Club was bailed in to what the Paris Club had already agreed. Does that prove the law’s not needed, or does it show how powerful the law was even before it was passed? My feeling is that the truth is somewhere in the middle, and that although Ivory Coast didn’t really need this law, it might come in handy for other HIPC countries.

There’s been much less wailing and gnashing of teeth from the buy side than I would have expected when it comes to this law, so it seems to me that investors turn out to have been one short step ahead of it. They’re already happy to enter into deals like the Ivorian exchange, and they’re reasonably confident that now the law has been passed, it’s not going to get expanded to include future indebtedness or non-HIPC countries. But at the same time, the law will probably help to clear up a few outstanding cases like the ongoing one against Liberia. I still don’t think it was particularly necessary, and I dislike governments messing around with contracts ex post, but it might conceivably do some good at the margin.


If the point is retiring as much debt as possible at the lowest price, it was successful. If it is intended to encourage further investment in Ivory Coast, it is debatable as this hair cut was after the original 80% haircut. It is more a sign of the pavlovian response to any liquidity and the big institutions dominating this paper. The reality is that Ivory Coast only got HIPC terms because of French pressure within the World Bank to expand the ratios to encompass their sphere of influence in West Africa…

And as to attracting further investment, Ivory Coast’s French advisers have insisted (with IMF support) that they should default on recently placed local currency bonds and notes on the basis that if the holder is foreign it constitutes external debt and they must default… Something that makes one wonder if Paris Club conversion clauses continue to have validity…

The fact that all the holders of the CFA paper were London based is well known…

Now that is far sighted, isn’t it?

Posted by MFSheehan | Report as abusive

The UK government and vulture funds

Felix Salmon
Feb 23, 2010 17:44 UTC

The UK government has finally published — in the waning days of the Brown government — its take on vulture funds, and whether there should be legislation trying to ban their activities. It’s not clear whether the report has the backing of the Conservatives, but it is clear that a lot of good-faith hard work has gone into it, and that it’s not in any way a knee-jerk piece of populist financier-bashing, a la Maxine Waters.

The conclusion of the UK government, after considering submissions which were roughly equally weighted on both sides of the issue, is that legislation is justified, if it’s tightly constrained to include only a very narrowly-defined set of existing loans to a small group of highly-indebted poor countries. In that case, goes the argument, there’s little risk that the legislation will later be expanded to include a wider set of debts. What’s more, the report explicitly states that “it remains the Government’s view that it would be detrimental to both international development and financial markets to attempt to extend this legislation to countries that are not part of the HIPC Initiative”.

The obvious question, of course, is then why it’s not detrimental to international development and financial markets to implement this kind of legislation at all. Already it’s been stripped of any narrow applicability to vulture funds: it now applies to all creditors of HIPC countries, even commercial creditors who extended trade credit. Under the proposed law, all of them would effectively be bailed in to any debt-relief scheme that the Paris Club and other rich nations agreed upon.

The report calculates the benefit of the legislation at just £145 million, down from an initial estimate of £254 million. For that relatively modest benefit, the UK government seems willing to fundamentally undermine a large number of contractual and property rights, by unilaterally rewriting the law under which loans were agreed. I can’t help but wonder whether it might not be cheaper and easier for all concerned if the UK simply put £145 million into a kitty and made it available to any HIPC countries which ended up having to pay out large sums of money to litigious creditors in UK courts.

One of the worrying aspects of the report is that it seems designed to please no one: the two camps are far apart, and either want no legislation at all or want legislation covering not only a few past HIPC debts but also a large number of other developing-country debts, both sovereign and corporate, and both present and future. As a result, those voting in favor of such a bill are likely to be equally keen to support a much more far-reaching bill, and if this bill passes then that would make the passage of a stronger bill in future that much more likely.

The UK government doesn’t see it that way:

The Government, however, recognises that there will always remain at least a theoretical possibility of such legislation being introduced with respect to future debts by a future government. The perception of such a risk could arise irrespective of this proposed legislation. The Government remains of the view that it is unlikely that lenders will assess the increase in that risk resulting from the legislation proposed to be significant enough to affect the availability or terms of lending to low income countries.

This I think is clearly false. Up until now, the status of UK law as the governing law for many global financial contracts has meant that no government has wanted to interfere with those well-understood mechanisms in such a fundamental manner as this. If such interference ever happens once, the likelihood of it happening again surely rises substantially. At the very least, there would be a move in new lending from London-law contracts to New York-law contracts, which certainly counts as a change in the terms of lending to low-income countries.

So while this report is undoubtedly sensible and sober by the standards of most vulture-bashing, I still think that the possible benefits of its recommendations are tiny compared to its possible costs. And I take some solace in the fact that a new government is likely to come in to power in the UK, which probably won’t make this kind of legislation a priority in the foreseeable future.


The report states:

Against this background, a commercial creditor that successfully litigates and recoups the full value of its debt does so only by free-riding on the relief provided by others, including the great majority of commercial creditors. Legislation is an effective solution to this problem if the benefits of eliminating this free-riding on the component of the debt claim that represents an economic rent rather than the underlying asset value outweighs the cost of interfering with property rights. The Impact Assessment, while unable to quantify the net impact, sets out reasons for expecting benefits to exceed costs for legislation restricted to prevention of recovery of the economic rent component. Legislation that prevented this would help bring about a full, fair and necessary resolution of HIPCs’ debts whilst protecting the rights of all creditors to recover the economic value of their claims. The welcome provision of HIPC-comparable relief by the majority of commercial creditors would not be affected; instead legislation would help to ensure that the proportion of creditors that currently go against this approach would be prevented from doing so.


This is erroneous in that commercial creditors marked their paper down long before bilateral Paris Club creditors who were paid far more in interest than their original principal on the debt they wrote off in the HIPC program.

It is also gobbledy gook. It admits that really the sponsors of the legislation have no real idea of what its impact will be, either on the HIPC countries concerned or the UK itself. This is because it is impossible to precisely define. But it does not even consider the risks. If cost of funds for HIPC countries move even by 25 basis points, the estimated savings are blown away.

It is an admission that the motive for this legislation is political and that the authors really have no idea what the economic impact on the HIPC countries and the UK will be. Pre-election cocktail anyone?

At a time when the probity of the economic data of EU issuers is very mush in the news, it is surprising to see one of its largest debtors supporting such legislation.

Posted by MichaelSheehan | Report as abusive

Is Russ Feingold joining the war on vulture funds?

Felix Salmon
Oct 16, 2009 16:35 UTC

Remember the silly war on vulture funds being waged in the UK and, in the US, by Congresswoman Maxine Waters? Well, I have good news and bad news. The bad news is that it’s making its way into the US Senate: Russ Feingold, the chairman of the Subcommittee on African Affairs, is thinking of introducing legislation of his own. The good news is that his staffers are reaching out to people like me, and seem genuinely interested in trying to understand the issues and the potential negative consequences of any legislation.

I just had a pretty long conversation with three of Feingold’s staffers on this subject, and they were asking if there was any way that they might be able to introduce a bill which curtailed some of the most egregious actions of vulture funds while not going as far as the Waters bill. I told them that the short answer is no: debt markets would react very badly to any attempt to prevent or impede trading debt instruments in the secondary market. And what’s more, none of these bills would make the problem of developing-country debt go away: it would simply keep that debt in the hands of original creditors, who might well start employing more vulture-like tactics to get their money back if they were prevented from selling their claims.

Feingold is commendably concerned about the fate of small African countries, who might be in the position of receiving hundreds of millions of dollars of debt relief from the US government, only to find that freed-up cashflow suddenly eyed by greedy vultures. And he doesn’t want hedge-fund types receiving any part of the money that Congress apportions to developing-country debt relief. I’m sympathetic. But the fact is that vulture funds have been having a dreadful time of it recently, and are losing cases much more frequently than they’re winning them. The total amount of money that’s at issue here is minuscule, compared to the enormous effect that it could have on the capital markets as a whole. The whole issue of vulture funds looks very much like a solution in search of a problem.

I told Feingold’s staffers that they should be sure to talk to a range of developing countries about their legislation — not just the poorest countries whose debt would be directly effected, but also richer countries who might see their credit spreads widen if Congress started messing about with the enforceability of sovereign debt obligations. Even the poorest countries aspire to tapping private capital in future, and might be very wary of legislation along these lines.

More generally, it might behoove market participants and industry groups to start talking seriously to Feingold’s office on this subject, especially if they can put together some hard data on just how much money we’re talking about here. It certainly makes sense to try to quantify the scale of the problem before putting a huge amount of effort, not to mention enormous knock-on consequences in the market, into some kind of solution.


Africa faces huge challenges:

1. It is split between Muslim and Christian (the latter sub equatorial)
2. Diseases such as malaria and drug trafficking
3. Rebels and warlords
4. Arms trade and Land mines
5. Corruption and Productivity
6. A ‘split’ African Union
7. Superpowers trying to get their claws on minerals and energy
8. Despots
9. Inconsistent distribution of aid and debt servicing.

As callous is it sounds, I agree with ‘urgs’. The IMF, World Bank & Co should manage funding, at present every free dollar should go the US citizens/taxpayers.

Coercive positioning for minerals and energy should take place on a transparent and arms-length basis.

Posted by Casper | Report as abusive

The unhelpful “vulture” meme

Felix Salmon
Sep 21, 2009 16:06 UTC

In advance of the G20 meeting, the Independent’s Johann Hari resuscitated the “evil vulture fund” meme, concentrating especially (and extremely selectively) on the deal between Zambia and Michael Sheehan.

Hari is late to this story: I gave a very full version of it on my blog back in February 2007, and everything I wrote back then is still germane today. But Sheehan has replied to Hari, and his letter’s worth reading, so I’ve put it after the jump.

Interestingly, the G20 meeting this year might well coincide with some kind of announcement from the Argentines that they are reopening their old debt-exchange deal from 2005. One of the sticking points with any deal is that Argentina’s finance minister, Amado Boudou, has said that he doesn’t want to do any deals with “vultures” who are litigating against Argentina in New York. He probably needn’t worry: they’re probably not the kind of investors likely to tender into any deal in any event. But the heated rhetoric surrounding this issue is clearly helping no one. Which is why it’s sad to see contentious columns like Hari’s.

In any case, here’s Sheehan’s letter:



The desperate argie minister says there will be a distinction: the stupids accepting the new swap and the buitres ( jackass ).

The desperate minister is not saying what will happen to this so called buitres! I suppose they will be repay in full after this joke so called swap!

Please if you want to pump argentina learn how to do this job first!

Posted by k | Report as abusive

UK Treasury goes to war on vulture funds

Felix Salmon
Aug 5, 2009 16:21 UTC

The war on vulture funds has gone from silly to serious, thanks to Her Majesty’s Treasury, which has just put out a “consultation on legislation” which could be hugely damaging to international sovereign debt capital markets.

The Foreword is written by Ian Pearson, the economic secretary to the Treasury, who singles out the Jubilee Debt Campaign by name as a particularly useful contributor to the paper. That comes as no surprise when you see what is being proposed:

Under UK laws, holders of existing debts of Heavily Indebted Poor Countries will only be able to reclaim these debts up to a set level, unless the courts consider it just and equitable to order otherwise.

The “set level” is clearly intended to be the level at which the Paris Club of rich nations has decided to give debt relief to the country in question. And it’s worth noting that this legislation would apply equally to vulture funds and to original creditors. A construction company, for instance, might have built a hospital in a particular country, and be owed a few million for its work — but under this law, if the country then got debt relief, the construction company could expect just pennies on the dollar.

Clearly, this would have a chilling effect on any foreign companies doing business in poor countries; it would also increase borrowing costs for all such countries. The paper puts the expected gross benefit to poor countries at no more than £33.2 million per year; my guess is that it would be much lower than that, given how spectacularly unsuccessful most attempts at suing HIPC nations turn out to be. (Generally, it’s easy to get a judgment against the country in question, and all but impossible to actually get paid.)

The net benefit, by contrast, would clearly be negative for HIPC countries in aggregate. Most of them don’t suffer at all from the vulture fund “problem” — in fact, they benefit from the existence of vulture funds because such funds provide a floor for the value of their debt. If legislation along these lines were to be enacted, the cost of funds in HIPC countries would rise — and even if it only rose by a few basis points, HIPC countries would still lose, every year, much more money than they stand to gain.

The way that the legislation seeks to minimize this effect is weak indeed:

The Government proposes that legislation is tightly targeted at the existing stock of HIPC debt and allows the court some discretion over the level of payment to award. The Government’s view is that designing the legislation in this way is necessary to minimise the risks to smoothly functioning financial markets whose importance was outlined in paragraphs 2.12- 2.14. For example, legislation should not impose unnecessary costs on lending beyond the appropriate risk pricing, as this would lead commercial lenders to provide less new financing to the countries affected, or to demand higher rates of interest. If it did, the benefit to developing countries may be more than counterbalanced by the cost.

Certainly, it helps that the legislation applies only to existing HIPC debt and not to future debt issuance. It also helps that there’s judicial discretion involved. But once legislation like this is passed, it will almost certainly be renewed on a semi-regular basis to keep it up to date: after all, in 2015 it’s going to look a bit weird that debts issued before 2009 are subject to this law but debts issued in 2010 are not. What’s more, the judicial discretion will only be valued by creditors once there have been a few precedent-setting cases, and it’ll take a long time for that to happen. In the meantime, businesses and lenders will assume that judges will simply comply with the spirit of the law.

The good news is that this is only a consultation document; I’m sure that both borrowers and lenders are putting together good arguments for Treasury as to why it’s a bad idea. What’s more, the current Labour government won’t be in power much longer, and I can’t see the Conservatives trying to push through something along these lines. But it’s depressing indeed that this idea has moved from the fringe (think Maxine Waters) to something approaching the mainstream. And I hope that Treasury backs down sharpish once the consultation period is over.



The Consultation paper is dated July 21. Are you sure it was just posted? Why would they back date it?