Felix Salmon

Sob story of the day, vulture-fund edition

Felix Salmon
Apr 11, 2011 21:22 UTC

Matt Wirz probably can’t be held responsible for the headline the WSJ put on his story today — “For Vultures, Slim Pickings.” But there’s no doubt that distressed-debt investors in Lee Enterprises are angry. And they’re angry for a very weird reason: after buying Lee’s debt at a 20% discount to face value because there was such a high likelihood of default, they’re now set to be repaid in full. That’s a 25% return in just over six months. Which certainly isn’t my idea of “slim pickings.”

The calculation behind the vultures’ investment, as far as I can tell, was that Lee was a solvent company with a liquidity problem. Their plan was to buy up the debt, see it default, seize control of the company, and end up with assets worth much more than the face value of the debt.

If they think the company is worth much more than its $1 billion debt load, of course, they can always go out and buy Lee’s common stock: it’s trading at less than $3 per share, valuing the company at just over $100 million. But that’s not the way that vulture investors like to make money: instead they specialize in bankruptcy-court legal maneuvers, and identifying the exact point in any company’s capital structure where a relatively modest tactical investment can ultimately result in complete control of the firm.

It’s hard to see how this kind of skillset adds value to the economy. It looks like a negative-sum game to me: the bondholders who sold below par lose money, the original shareholders get wiped out completely, the courts and lawyers take their tithe, and the vultures — if they’re successful — rake in everybody else’s chips. I suppose the investors betting on default do help to support the price of the debt at the point when the company’s outlook is bleakest. But there’s nothing there to justify annualized returns of well over 50%. So well done to Lee Enterprises, and its bankers, for managing to remain afloat.

As for the vultures: stop whining. You made a large amount of money in a very low-interest-rate environment featuring precious few defaults. Go enjoy your spoils, rather than kvetching to the WSJ about how you missed out on even more.


Well, if the stock is overvalued, then this sort of strategy ought to bring the price down. More fundamentally, this sort of opportunity may indicate a company that is not being run optimally.

If in any case no value is being added, this is simply the price of a stable legal system.

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The vulture fund debate

Felix Salmon
Mar 2, 2010 23:08 UTC

Greg Palast is back bashing vulture funds again: his Newsnight piece (web story here) is airing tonight, in slightly different form, on BBC World News America. The last time he mined this particular vein, I responded with a 5,500-word blog entry in defense of vulture funds, and I’m determined not to disappear down that particular rabbit hole this time, especially since all concerned — including Palast — seem to be much more constructive this time around.

So instead, let’s look at the anti-vulture bill which recently got passed by the UK parliament in second reading and which is supported by the UK government — but which still has various hurdles to pass before it becomes law. Time is short, before the UK general election, and the Conservatives, if they win (which they might not) don’t seem to consider this bill a priority; indeed, they’re forcing it to go through “full committee”, which takes me well past my level of understanding when it comes to UK parliamentary procedure.

There’s lots of detail on the bill in this House of Commons research paper, which, I’m flattered to note, quotes not only my 2007 blog entry but also a couple of follow-ups I made here in August and October.

But the interesting most thing about the bill, which will almost certainly pass if there’s another Labour government and which might well pass even if there isn’t, isn’t in the research paper at all. It’s that, surprisingly, the emerging-market debt community — which will normally scream and shout at any provocation — doesn’t seem particularly upset by it. Sure, they argued vehemently against it when given the opportunity. But in its present form, the bill is so narrow in scope that many market participants (by which I mean vulture funds) don’t see much of an immediate threat.

For one thing, the bill covers only the past debts of HIPC countries, and then only debts where the private sector has already agreed to a restructuring plan. Distressed debt investors like Hans Humes, who was happy to give an interview to Palast, are now mainstream enough that they’re key participants in London Club negotiations — which means that they actually like being able to bail in would-be holdouts once a deal emerges. For instance, Palast concentrates on the recent Liberia deal, which Humes helped to negotiate. He’s accepting 3 cents on the dollar from Liberia, a HIPC country, and as a result he’s unhappy if any other funds try to derail the process at the last minute through aggressive litigation.

If you look at Palast’s report, he clearly sides with Humes against Eric Hermann and Michael Straus: Palast characterizes the deal Humes helped to strike as being a legitimate part of “the international debt relief process for Liberia”. This is a pretty helpful stance, especially since Humes counts as a vulture investor himself, by most definitions; I’m pretty sure he’s making some kind of profit on the Liberia deal, even at 3 cents on the dollar. As for Humes, he tells me that the UK bill “is not nearly as bad as it could have been”. The two sides are hardly on exactly the same page, but it seems to me that they’re not as far away as they were, thanks largely to the fact that the UK Treasury was reasonably sensible in the way it drafted the bill.

There are worries, of course. The biggest is that if this bill passes, it will open the way for more aggressive bills being passed into law further down the road, not only in the UK but also in the US.

And this bill definitely has weaknesses: it allows HIPC governments, for instance, to be sued not only by domestic vulture funds but also by companies which provided “goods or services” — which, in the case of countries like Congo and Liberia, is likely to mean arms. If you’re going to attack vultures, it’s a bit weird that you insist on carving out an exception for arms dealers at the same time.

But it does seem to me that we’re moving towards a much more constructive debate here than I’ve seen until now: instead of having the two sides talking uncomprehendingly past each other, this bill has carved out a middle ground which neither side particularly likes but which neither side particularly loathes, either. So long as we stay at or near this middle ground, there’s hope that the harm to markets from this legislation might be relatively limited.

So maybe there’s some kind of move to the middle afoot — Palast and Humes are two examples, and Lee Buchheit is another. They’re never going to meet in exactly the same place, of course — I’m not talking about a consensus here — but even Maxine Waters seems to be moderating her position a little, and it’s pretty obvious that the arguments are taking place over ever-decreasing sums of money. If I were to look on the bright side here, I’d say that there was some hope that the vulture-fund debate is slowly fading into irrelevance and anachronism, with a couple of narrowly-written laws mopping up what’s left of it. Let’s hope so.