There have always been people who have prospered from others’ financial misfortunes; what is one person's financial problem, seems to be a great deal to someone else ready to pounce on it.
That’s exactly what’s happening in the debt markets now. Many major financial institutions had to write off billions of dollars in debt that had nosedived in value over the last few months. Some hedge funds have collapsed because of it.
Well, the buyers, known as “vultures” in the industry, have already started to pounce. The Cayman Islands Monetary Authority had a huge increase in the number of hedge funds registering in January 2008. Yolanda McCoy, head of the investments and securities division of CIMA, noted that many of the new funds were the so-called “vulture” funds, which were formed to pick over and buy up the remnants of the distressed debt that has overwhelmed the financial markets.
As one lawyer noted, “the vulture funds serve the same purpose as sharks do in the ocean. They are coming in to clean up the mess from all the bad debt, in the same way sharks eat fish in the ocean. It’s actually a service.”
Knighthead Domestic and Knighthead Offshore, are the US and Cayman Islands-domiciled distressed credit and event driven funds set to be launched on May 1 by Knighthead Capital, New York.
The funds will buy distressed corporate debt and seek to have a voice in the business changes made by companies in financial distress. Tom Wagner, a principal of the firm, says “we think it’s a fantastic opportunity to launch now,” and points to the huge amount of debt the fund will have to choose from. He expects the funds will have a combined $700m to $1bn in assets soon.
Dalton Investments, Los Angeles, which profited big time from the Asian debt crisis ten years ago, is also ready to launch a distressed debt fund which will invest in distressed mortgage-backed securities. Steven Persky, founder and CEO, says there are literally “hundreds of thousands” of mortgage loans that are now sitting in distressed mortgage backed securities. He expects the fund will soon have “hundreds of millions” of dollars to invest.
According to Persky, while the pickings are huge, to get the best will require some serious research, which his firm will do, hiring Todd Sherer, of Countrywide Financial to head their research team. Could there be anyone better than a former Countrywide trader to pick over all those bad mortgages?
Two more distressed debt funds are scheduled to launch in June. Colchis Capital plans to launch the Distresssed Bank Debt Fund, to invest in distressed senior bank debt, and Distressed RMBS Fund, to invest in distressed mortgage backed securities. Dan Nero, CFO of Colchis, declined to comment on the funds.