Hedge Fund Reader : Hedge Funds dominate second-lien loan market

Comments

July 27, 2005

Hedge Funds dominate second-lien loan market

Hedge Funds have entered a somewhat alien arena of ‘lending’ and are thriving well. Their lending rules and strategies are very different from those of traditional lenders like banks and Wall Street firms. They chiefly target those firms that are cash-strapped and who are not getting a loan form the traditional sources. These distressed companies are willing to take a loan at higher rate of interest and therefore benefit the fund. For the hedge funds, these are high risk & high return investments. The funds however ‘hedge’ their loans by shorting the stock or bonds of the distressed company. This strategy is being seen as detrimental to the health of the borrower as it may lead to its bankruptcy. Hedge Funds are seen to be insensitive to the possible downfall and as such is being seen as a villain. Hedge Funds dominate the so-called second-lien loan market which gives the lenders certain rights over some of the borrowing company’s assets. Second-lien loans can be risky since during bankruptcy reorganization other creditors often have superior claims on the borrower's assets. Post-gazette.com reports:

“Hedge funds acting in this market "are dramatically changing the landscape" of bankruptcy filings, says Michael Kramer, a restructuring adviser who recently left Greenhill & Co. "This is the first (lending) cycle where loans from hedge funds have been a factor.”

--
Did you enjoy this post?

July 27, 2005 in Emerging Markets | Permalink