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.