A lot of us are worried in the global financial crisis that we are all facing. Companies are cutting down their costs. Unemployment rate rises. Economies are entering recession. Many are left homeless and are doing their best to make ends meet.
While this scenario may be a disadvantage for a lot of us, this crisis poses an advantage and a great opportunity for the so-called “VULTURE FUNDS“. It’s a great time to hunt for their food. But what exactly are vulture funds in the first place?
Just like vultures, birds who prey on dead bodies of animals, vulture funds also prey on dead things. They prey on distressed debts and assets of ailing companies experiencing financial turmoil. Sometimes, they are also called special situations fund. The ultimate goal is to buy these distressed debts and assets at a very low bargain prices and profit from it turning trashes into an instant gold.
During the height of the Asian Financial Crisis in 1997, a lot of debts and assets turned sour. A lot of borrowers who availed loans in dollar currency were left with a ballooned principal and interest as an effect of rising mighty dollar against a basket of asian currencies. Because of this, there’s an aggressive increase of non performing assets in the balance sheets of banks which are considered as trashes ready for write down. In order to avoid huge potential losses from these trashes, banks dispose it by selling to vulture funds.
One of the countries hardly hit by the Asian Financial Crisis before was our country Philippines. Non-Performing Loan Ratio (NPL Ratio), the ratio of non performing loans to total loans of banks, reached its peak to as much as 20% on their balance sheets. In order to address this problem, the Congress passed a law in 2002 called Special Purpose Vehicle Act of 2002 (SPV Act of 2002). This particular law gives huge tax incentives to vulture funds buying distressed debts and assets of banks. Six years after the passage of the law, banks now have considerably reduced their NPL ratio to as low as 5% disposing billions of distressed debts and assets to vulture funds set up by leading investment banks such as Deutsche Bank, Lehman Brothers, JP Morgan Chase, Morgan Stanley, Amroc Investments, and Barclays Capital.
On the latest study conducted by Debtwire on Asian Distressed Debt Outlook for 2009 surveyed among 100 hedge funds, China and Indonesia posed the greatest opportunity for distressed debts and assets as an effect of the global financial crisis that we are currently facing.
Truly, vulture funds can easily turn banks’ trashes into gold. But as with any other investments, high returns mean high risks. Detailed due diligence and the right resolution strategy is the key in a successful distressed debts and assets investments. Once again, vulture funds will be on their active hunting season for their preys…