Financial reform bill could hurt distressed debt investors

May 04, 2010

A relatively new proposal in the Senate bill threatens to penalize buyers of distressed debt. “This uncertainty likely will inhibit investors from investing in, providing capital to, or otherwise doing business with, financially weak or weakening firms,” says the MFA.

As the 1,400-page Senate bill on financial reform makes its way through Congress, hedge funds are increasingly worried about proposed bankruptcy rules for failed financial institutions that could make life difficult for distressed debt investors. The latest proposed legislation would give the Federal Deposit Insurance Corporation wide latitude in determining how to treat what it terms “similarly situated creditors” when a financial institution fails. As distressed debt investors, hedge funds are likely to be those creditors. “We’re really flummoxed as to...