Hedge funds and private equity companies specialized in acquiring the debts of bankrupt companies are reportedly in negotiation with Greek banks to purchase loans. At a spot price of 5-50% of their value and sell them further for 100% profit.
According to economic news website newmoney.gr, the foreign companies, also known as ‘distressed funds’, are specialized in buying problem loans and assets from companies that went bankrupt.
“Thousands of Greeks’ loan titles will change hands in short time.
Officials of these funds are currently in negotiation with Greek banks aiming to buy the loan titles in prices much lower than the nominal value.
When these sales conclude, the borrowers will find themselves to owe money not to the banks but to foreign companies that will start the money collections procedures as soon as possible. The loans will have been sold to foreign funds in low prices.
As soon as the home eviction protection expires, intensified efforts to collect the loans will start with seizures and auctions as is expected that many borrowers won’t be in position to repay their loans.”
Currently, the eviction law protects home owners for loans up to 180,000 euro. The law expired on December 31st 2012 but took an extension of one more year, despite the Troika pressure.
why hedge funds love distressed debts?
Hedge funds can generate massive returns in relatively short periods of time, and they can also go into financial crises just as quickly. What kind of investments can produce such diverse returns? One answer is distressed debt. The term can be loosely defined as the debt of companies that have filed for bankruptcy or have a significant chance of filing for bankruptcy in the near future.
You might wonder why a hedge fund – or any investor, for that matter – would want to invest in bonds with such a high likelihood of defaulting. The answer is simple: the more risk you take on, the more reward you can potentially make. Distressed debt sells at a very low percentage of par value. If the once-distressed company emerges from bankruptcy as a viable firm, that once-distressed debt will be selling for a considerably higher price.
These potentially large returns attract investors, particularly investors such as hedge funds. In this article we’ll look at the connection between hedge funds and distressed debt, what ordinary investors can do to get involved and if the risks are really worth the rewards. (investopedia)
The loans of misery
According to information of money-money.gr , the offers of the foreign funds start from 5% of the loan value for consumer loans that are not served and go up to 45-50% for mortgage loans.
“The banks want to sell the loans of any kind like consumer, mortgage, business, even shipping loans. main aim of the banks is to decrease the bad loans they have in their assets.
Even thought no purchase has been done so far, banks admit that they want to sell loan portfolios as soon as they get a good price.
However, no bank can sell the loan to a third party without previously inform the borrower.
Next month, the Greek government is going to submit a bill that will determine the terms and conditions of borrowers protection.”
While this loan purchase seems to take a long time to materialize (I think KTG wrote about it last summer) it is inevitable.
So get prepared, if you can’t repay back your loan tranches.