Case | HBS Case Collection | June 2006 (Revised December 2007)

Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone

by Laura Alfaro and Ingrid Vogel


The role of distressed debt funds, also known as "vulture funds," in sovereign debt restructuring was a hotly debated topic, especially after the success of Elliot Associates in converting an $11 million investment in Peruvian bonds worth $21 million into a $58 million cash payout from the country, representing the full face value of the bonds plus past-due interest. Highlights the problems associated with debt restructuring coordination. On the one hand, many observers derided firms such as Elliot and Dart as "vultures" or "rouge creditors" who sought to profit on sovereign debt restructurings at the expense of countries suffering economic hardship and of the majority of bondholders whose cooperation allowed the restructurings to take place. Critics believed that these holdout creditors created "collective action problems" and presented a major obstacle to successful sovereign debt restructurings. On the other hand, other observers argued that activist investors actually improved the market overall by demonstrating the enforceability of contracts. In fact, they argued that creditors faced too many hurdles in collecting against countries after receiving favorable judgments in support of claims.

Keywords: Borrowing and Debt; Bonds; Investment Activism; Investment Funds; Sovereign Finance; Government and Politics; Contracts; Business and Government Relations; Peru;


Alfaro, Laura, and Ingrid Vogel. Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone. Harvard Business School Case 706-057, June 2006. (Revised December 2007.)