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"Vulture Funds"

Have you been following the NML Capital vs. Argentina vulture debt case? Learn more about the "'trial of the century' in sovereign debt restructuring."

What are “Vulture Funds?”

The term "vulture fund" refers to a hedge fund that buys debt on the secondary market for pennies on the dollar and then sues the debtor for full repayment of the original loan plus interest. "Vulture funds" are usually secretive and are often based in offshore tax havens like the Cayman Islands. In some cases, there is no information on who actually owns them.

"Vulture funds" have been known to target the cheap debt of poor or financially-distressed countries. Poor countries that are eligible for debt cancellation are especially vulnerable. "Vulture funds" have been known to track the debt relief process, buy the debt of nations about to receive debt relief and then sue the country after it has received a windfall of resources thanks to debt cancellation.

“Vulture Fund” Case Studies

In 1999, a "vulture fund" called Donegal International bought Zambian debt for $3.3 million – the original loan had been worth $15 million. Six years later, Zambia's debt to the IMF and World Bank was cancelled and the country was able to save $40 million a year. Donegal sued Zambia for the full amount, plus interest and costs, seeking $55 million, or a 1600% profit. The amount Donegal attempted to collect was roughly equivalent at the time to Zambia’s national health budget. In April 2007, a London court ruled that Zambia had to pay $15.4 million plus a share of legal costs to Donegal.

The Democratic Republic of Congo has seen numerous "vulture funds" acquire its outstanding debt over the past few decades, most notably Themis Capital and FG Hemisphere. In July 2014, the U.S. Southern District of New York ruled the DRC must pay Themis and Des Moines Investments roughly $70 million in principal and interest. The debt, initially purchased for $18 million, provided the hedge funds with massive profits at the expense of the world’s second poorest country (according to the 2013 UN Human Development Index).

Learn more through our "Vulture Fund" Country Studies.

“Vulture Funds” and Argentina

In 2001, Argentina defaulted on roughly $81 billion in debt. It then proceeded to restructure its debts, with roughly 92% of its creditors accepting a deal for .30 on the dollar. NML Capital, a hedge fund that is a subsidiary of Paul Singer's Elliott Capital Management, purchased some of Argentina's debt on a secondary market at a discounted price. Led by NML Capital, holdout creditors (including other hedge funds), rejected the restructuring and sued Argentina for the full amount in New York State courts. In November 2012, US District Judge Thomas Griesa ordered Argentina to pay NML Capital and other holdouts in full (roughly $1.33 billion). The court ruled that until Argentina paid these hold-out creditors, it was legally barred from paying any of its creditors. Argentina appealed the decision all the way to the Supreme Court, which on June 16, 2014, declined to hear the case. When Argentina attempted to pay its restructured bondholders on June 30, Judge Griesa blocked the payment. The country defaulted when was unable to renegotiate its debts with holdout creditors by a July 30 deadline.

Learn more about the "'trial of the century' in sovereign debt restructuring.

News and Developments on "Vulture Funds"

September 9 – The United Nations votes to create a global bankruptcy process that could prevent hold-outs from blocking debt restructurings. The resolution passed by a vote of 124-11. 

September 5 – NML Capital subpoenas banks in China and the US in search of Argentine assets.

September 4 - Argentina's Senate approves a debt-swap bill that could allow Argentina to circumvent US financial institutions to pay its restructured bondholders.

August 29 - Banks and investors propose a new debt framework aimed at preventing hold-out creditor litigation.

August 20 - Argentina announces it will conduct a bond swap to route payments to the majority of its creditors through Argentina financial institutions. The move is designed to avoid US Judge Thomas Griesa's ruling that the Bank of New York Mellon cannot process Argentine payments to the majority of its creditors.

July 30, 2014 - Negotiations with hold-out creditors fail and Argentina defaults on its debt for the second time in 13 years.

July 9, 2014 - U.S. Southern District of New York Judge Paul A. Engelmayer rules that the Democratic Republic of Congo (DRC) must pay two hedge funds roughly $70 million in principal and interest. The DRC is ranked second to last in the United Nations' Human Development Index.

June 27, 2014 - Argentina attempts to pay its restructured bondholders and deposits more than $500 million in the Bank of New York Mellon, but Judge Griesa orders the payment blocked unless Argentina also pays the holdout creditors.

June 16, 2014 - The Supreme Court rejects Argentina's appeal for a hearing in its landmark debt case against hold-out hedge funds. The decision will impact debt restructurings, poor country access to credit and propel predatory behavior. The Court also rules against Argentina in a related case involving the ability of holdout creditors to locate the foreign assets of the sovereign nations they are suing. Read the full story in The Washington Post.

March 24, 2014 - Jubilee USA and nearly 80 faith and development partners file an amicus brief with the US Supreme Court in the Argentina/NML capital case. The brief argues that a court ruling in favor of the hedge funds would harm US bipartisan debt policy, global financial stability, and the world's poorest people. Read the amicus brief here.

November 23, 2012 - Argentina is ordered to pay $1.3 billion to a group of plaintiffs, led by the fund NML Capital, that hold defaulted bonds. The payment, based on an "equal footing" clause, was due by December 15, the same day Argentina was due to make a payment to bondholders who exchanged their defaulted debt during restructurings in 2005 and 2010. That decision leaves Argentina with the option to either pay no one or pay everyone.

July 18, 2012 - In a surprise decision in the Jersey Isles, the UK's Privy Council overturns a prior ruling, siding with the Democratic Republic of Congo against hedge fund FG Hemisphere. FG Hemisphere was seeking $100 million from the DRC for a debt it had bought for just $3 million. While having initially lost the case, the DRC has won on final appeal. While the UK passed a law in 2010 limiting the amount a “vulture fund” could claim from impoverished countries, it did not apply to crown protectorates, like Jersey, where such funds could still pursue cases.

December 1, 2009 - A British court rules against Liberia and awards two “vulture funds” $20 million from a debt that dates back to 1978. Read more about Liberia here.

June 18, 2009 - Representative Maxine Waters, Representative Spencer Bachus and Representative Judy Biggert introduces the Stop VULTURE Funds Act (H.R. 2932), a bill in the House of Representatives that would prevent "vulture funds" from making this excessive profit at the expense of poor countries. (Click here to see the list of cosponsors)

Policy Resources Connected to the Stop VULTURE Funds Act:

"Vulture Funds" Glossary

"Vulture Funds" Policy Brief

"Vulture Funds:" A Threat to the Poorest Countries and U.S. Foreign Assistance

Stop Vulture Culture

Testimony by Danny Glover on "Vulture Funds"

April, 2007 - A London court rules that Zambia must pay $15.4 million plus a share of legal costs to Donegal International, a “vulture fund” that initially sued for over $55 million in debt and legal fees. Read more about Zambia here.

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