New York (HedgeCo.Net) – Some major hedge funds are focusing on Detroit, looking for ways to profit from the city’s distressed debt, according to an article from the Detroit Free press.
Vulture fund is a term commonly used to refer to a private equity or hedge fund that invests in debt considered to be very weak or in imminent default. Investors in the fund profit by buying this debt at a discounted price on a secondary market and then suing the debtor for a larger amount than the purchasing price. Debtors can include companies, countries or individuals. The term is used to criticize the fund for strategically profiting off of debtors that are in financial distress.
“With $8.6 billion in long-term debt, Detroit would be comparable to the biggest corporate failures if it eventually files for bankruptcy, a major advantage for big hedge funds that are used to investing hundreds of millions of dollars at a time.” Reuters reports in an article called: Hedge funds in search of distress take a look at Detroit. “The sheer size of Detroit’s debt should make it easier for the funds to track down very large chunks of bonds, magnifying their profit potential, cutting their research and advisory costs and giving them leverage when it comes to restructuring talks.”
The city of Detroit filed for Chapter 9 bankruptcy on July 18, 2013. It is the largest municipal bankruptcy filing in U.S. history by debt, estimated to be $18–20 billion, exceeding Jefferson County, Alabama’s $4 billion filing in 2011. Detroit is also the largest city by population in the U.S. history to file for Chapter 9 bankruptcy, more than twice as large as Stockton, California, which filed in 2012. Detroit’s population has declined from a peak of 1.8 million in 1950; recently, the New York Times called the city “home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.”
Detroit’s bankruptcy filing followed a declaration of financial emergency in March 2013 that resulted in Kevyn Orr being appointed emergency manager. Orr’s subsequent negotiations sought to get creditors to willingly “take a haircut” on Detroit’s debt, and were ultimately unsuccessful. (source Wikipedia)
On July 19, 2013, Judge Rosemarie Aquilina of the Thirtieth Judicial Circuit Court of Michigan ruled the bankruptcy filing by Detroit violated Article IX, Section 24, of the Michigan Constitution and ordered Governor Rick Snyder to withdraw the filing immediately. On July 23, an appeals court stayed the circuit court ruling pending future rulings on Michigan Attorney General Bill Schuette’s appeal. On July 24, the Bankruptcy Court added its own, federal stay of the state court proceedings. On August 2, the bankruptcy court set a hearing date of October 23, 2013, for trial on any objections to the city’s eligibility for Chapter 9 bankruptcy, and March 1, 2014, as the deadline for the city to file a bankruptcy plan.
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