New Belgian Law targets "Vulture Funds" buying up distressed Sovereign debt
A draft law in Belgium1 aims to reduce the number of “vulture fund” claims, against insolvent sovereign states, being brought in Belgium. The draft law limits the right of sovereign states’ creditors to repayment if it can be shown that they are looking to obtain an “illegitimate profit”. The draft bill was supported unanimously on 9 June 20152 by a commission of the House of Representatives specialising in financial matters and is set to be discussed and voted on by the House of Representatives in the coming months.
The Bill aims at “vulture funds”, defined as investment companies, usually located in tax havens, that buy state debt at a discounted price, when it is about to be written off, and then sue the state for the full value of the debt plus interest. The explanatory note of the Bill promotes an idea that finance should benefit the real economy as opposed to creating social and economic disorder. The explanatory note denounces the immorality of these funds, which, according to the note, usually refuse to participate in debt restructuring, with negative consequences for the debtor states and their populations. The Bill refers to the litigation by “vulture funds” across the world against states in default, which has increased in the last two decades, including the well-known New York litigation proceedings involving the Republic of Argentina (see September 2013 European Finance Litigation Review article “Belgian aspects of the Argentine sovereign debt litigation”).
A new cap on recovery
The Bill creates a defence for debtor states or other parties (the Defendant) sued by “vulture-funds” seeking payment. This limits a creditor’s right to payment from the Defendant to the price paid by the creditor when it acquired the bonds or the claim. The underpinning idea is that “vulture funds” buy the bonds or claim at a vastly discounted price.
To use this new defence, the Defendant must prove that the creditor would derive an “illegitimate profit”, should it be successful. The burden of proof is on the Defendant. The Bill states that an illegitimate profit will be inferred from (cumulatively):
(1) the disproportionate difference between the face value of the bond (or claim) and the price paid by the “vulture-fund” in acquiring such bonds (or claims), and
(2) any of the following circumstances: (i) the Defendant is insolvent; (ii) the creditors are based in a tax haven; (iii) the creditors systematically engage in proceedings to obtain payment; (iv) the creditors have refused a debt restructuring initiated by the Defendant; (v) the creditors took advantage of the Defendant’s weakness to negotiate payment terms that are not at arms’ length; and (vi) the payment of all the amounts claimed by the creditors would have a material impact on the financial situation of the Defendant and would most likely jeopardise the social and economic development of the population of the Defendant.
The Bill was introduced to the House of Representatives on 30 April 2015, and was unanimously approved on 9 June 2015 by a commission of the House of Representatives specialising in financial matters. The Bill should be presented in the coming months to the House of Representatives in order that the House may debate and vote upon it.
A number of the criteria for an illegitimate profit seem subjective and difficult to prove. How do you prove a material impact on the financial situation of a state, or the impact on social and economic development? In our view, this makes the Bill very difficult to implement.
It is interesting to note that, although the Bill seems to be supported by a large spectrum of political parties (majority and opposition), the Belgian National Bank (BNB), which was consulted in the legislative process, has criticised it. According to the BNB, only international initiatives, such as those proposed by the International Capital Market Association (supported by the IMF and the G-20), would be effective to tackle this issue. The BNB also criticises the vagueness of the criteria for an illegitimate profit and suggests that this creates a level of uncertainty for the financial institutions dealing with the bonds as depositories. The Institute of International Finance (IIF) has also addressed a letter to the House echoing the objections of the BNB and stressing that the Bill is likely to have an adverse impact on the derivatives market because it could discourage investors from acquiring sovereign debt. The IIF claims that it could also drive the price of sovereign debt down, with the ironic result of making the position of issuing States worse rather than better.
1. Doc. 54 1057/001, available in Dutch and French on the website of the House of Representative: www.dekamer.be or www.lachambre.be.
2. Doc. DOC 54 1057/003 , available in Dutch and French on the website of the House of Representative: www.dekamer.be or www.lachambre.be.