Hedge Funds that invest in distressed debt have been “lying in wait” for the next wave of bankruptcies to emerge. When the tsunami hits, it is likely that these investors will be the dominant players in the market place.
With the credit crunch upon us, it is doubtful that conventional financial institutions, such as banks, will have the appetite to provide debtor-in-possession or exit financing to Chapter 11 debtors. Hedge Funds, flush with newly raised capital, will likely fill the void.
In addition, the Hedge Fund market for the purchase and sale of defaulted secondary bank loans has skyrocketed in recent years. Conventional lenders who hold outstanding pre-petition loan claims no longer have the staying power to maintain their claims to the finish line. Add to this the ever growing and competitive market for the purchase and sale of bankruptcy trade claims, and you can expect a distressed debt Hedge Fund feeding frenzy where Hedge Funds purchase and hold vast tranches of creditor claims and provide post-petition financing. Since Hedge Funds are more likely to pursue aggressive strategies to increase value, things could get very spirited. But buyers beware! Those who navigate these secondary waters would be wise to have someone on board who has sailed through bankruptcy before.