Hedge fund double whammy!

July 23, 2013

In an article entitled ‘As Banks Retreat, Hedge Funds Smell Profit‘ (July 22) – the first in a series – the WSJ reports that alternative forms of corporate lending are making a comeback. What’s the appeal for a private investment fund? The 11.7%,  average return it can make of  by tossing a lifeline to a distressed company. Compare this to the 5.2% interest rate a bank can expect on the average small business loan.

Whammy!

Swooping in at the last minute means private lenders can exact elevated rates of interest. It also means they can demand terms that are in their favor, sometimes at the expense of unsecured bondholders. Many of these loans are secured by the company’s assets, in what is known as asset-based lending. Others include warrants to buy shares, or involves bonds that can be converted into stock.

Double whammy!

Is this kind of lending… exploitative? The funds defend themselves by arguing they’re stepping into a void to assist companies that do not have easy access to capital markets. It seems just as plausible they’re building a new pipeline between business and the capital markets, by working out terms that will attract shadow banking to this sector.

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