Vulture Investing

The vulture is an animal many dislike. It is not a particularly beautiful bird. Either in flight or at rest. They are also scavengers since they feast on the flesh of either dead or rotting animals.

I’m sure you are wondering. Is this Money Africa? Or a biology class?

Fear not. There is a link between the vulture and investing. It is a term known as vulture investing.

Vulture investors focus on assets that are at the point of death literally.

They buy bonds that are close to default and shares of companies that are close to bankruptcy.

So what is the attraction, you wonder?
Why play with fire? The key driver is the discount. Stocks or bonds with poor fundamentals, trade at a discount.

Above is the chart for Hertz. The car hire company. Its share price slumped when the firm stated it was filing for bankruptcy. Then rallied when it announced it would sell new shares. It then slumped again when the Securities and Exchange Commission (SEC) refused to give approval for that.

Before you dive in.

While it may seem all fun and exciting, there are risks involved. When a company goes bankrupt, bonds (and other debt holders) take precedence over shareholders. Even at that, sorting some defaults (such as default by a nation) can take years.

Sometimes it can turn quite nasty.
Elliott Management (a hedge fund) battled the government of Argentina in court for 15 years, as the company was unwilling to take a loss on the country’s bonds. Eventually, the case was settled for $2.4 billion. Elliott made 4 times its investment.

As 2020 rolls on, there will be lots of opportunities. Some low risk. Some medium risk. Some high risk.

As attractive as this vulture investment may be. Don’t take risks you do not understand or can not afford financially.