A/HRC/33/54 7. According to Cephas Lumina, the former Independent Expert on the effects of foreign debt on human rights, vulture funds are: private commercial entities that acquire, either by purchase, assignment or some other form of transaction, defaulted or distressed debts, and sometimes actual court judgments, with the aim of achieving a high return. In the sovereign debt context, vulture funds (or “distressed debt funds”, as they often describe themselves) usually acquire the defaulted sovereign debt of poor countries (many of which are heavily indebted poor countries (HIPCs), on the secondary market at a price far less than its face value and then attempt, through litigation, seizure of assets or political pressure, to seek repayment of the full face value of the debt together with interest, penalties and legal fees (see A/HRC/14/21, para. 8). 8. These commercial entities are not lenders, but private hedge funds that purchase on the secondary market (or collect from other bondholders) distressed debt at discounted prices and then sue the debtor for a much higher amount. They are popularly called “vultures” because of their modus operandi, whereby they: (a) Target sovereign States with distressed economies and frequently with weak capacity for legal defence. According to the African Development Bank, 20 of the 36 poorest developing countries have been threatened or targeted by aggressive litigation by vulture funds since 1999.2 The World Bank estimates that more than one third of the countries that qualified for its debt relief initiative have been targeted by lawsuits by at least 38 litigating creditors, with judgments totalling $1 billion in 26 of the cases;3 (b) Operate and take advantage of the lack of regulation of the secondary market. To obtain significant discounts, vulture funds acquire sovereign bonds when the indebted country is either close to default or has already defaulted on its debt. In the secondary market, investors can operate with great secrecy in terms of both ownership and operations. Sovereign bonds are thus traded between investors without the concerned debtor State necessarily being aware or informed of such operations;4 (c) Refuse systematically to participate in orderly and voluntary debt restructuring processes. Once a State starts negotiations with private bondholders aimed at restructuring the sovereign debt, vulture funds exercise their “right” to hold out or collect and purchase sovereign distressed bonds, then wait until the country’s financial situation has improved to start negotiations for a better deal. Their position is strengthened by difficulties that the debtor State may encounter in reaccessing the international capital markets.5 Under such circumstances, the threat of being subjected to a long and costly process with a particularly “aggressive” litigator imposes additional pressure on the State that may prompt it to accept a less favourable settlement; (d) Sue the country for reimbursement of the full value of the bond, plus interest and delay penalties. In cases where an agreement with the State is not reached, vulture funds can file a legal claim to seek reimbursement. To ensure that they get a favourable 2 3 4 5 4 African Development Bank Group, “Vulture funds in the sovereign debt context”. Ibid. As has been pointed out, big institutional investors do not like to sue sovereign States and therefore can obtain some return by selling their defaulted debt to vulture funds on the secondary market. D. Sookum, Stop Vulture Fund Lawsuit: A Handbook (Commonwealth Secretariat, 2010), p. 11. Vulture funds may resort not only to court proceedings but also to lobbying and other pressure tactics, which can range from attempting to attach the debtor State’s assets to organizing discrediting press campaigns with a view to forcing the Government to pay. R. Kupelian and M.S. Rivas, “Vulture funds: the lawsuit against Argentina and the challenge they pose to the world economy”, Centro de Economía y Finanzas para el Desarrollo de la Argentina, Working Paper No. 49, February 2014, p. 7.