The Vultures Take Wing (CFO.com)

Some excerpts ...

Behind this cyclical burst of activity is a deeper trend. Distress, once the preserve of specialists, is now attracting the mainstream. Edward Altman, a finance professor, counts 170 institutions that invest primarily in distress, more than ever before, with an estimated $300 billion at their disposal. The field has benefited from growing interest in "alternative" investing (which also includes hedge funds, private equity and commodities). Punting on clapped-out securities is now on many a hedge fund's list of favoured strategies.

More junk bonds are being issued than ever before, more risky loans are being offered. And remarkably, this lending free-for-all continues despite a sharp drop in credit ratings, says Martin Fridson, editor of the indispensable Distressed Debt Investor. No one seems bothered that 17 percent of senior, unsecured junk-bond issues are on the lowest possible rung, compared with 2 percent in 1990.

The next wave of distress will be unlike the last in two respects. First, commercial banks no longer dominate the process. According to Standard & Poor's, a rating agency, non-banks such as hedge funds now make roughly half of all high-yielding leveraged loans and hold the lion's share of the secondary market.

Though hedge funds offer quicker, more creative solutions than banks did in the past, their tactics can upset other creditors. They have also ruffled the feathers of the private-equity firms that sponsor leveraged takeovers. Fearful that activist funds will make trouble in a downturn, the buy-out shops have started asking their banks to insert legal clauses that prevent their debt from being sold into such hands.

The second change is likely to cause conflict too. Borrowers' capital structures — the various layers of debt and equity, each with different rights in the event of default — are now more complex. It is less clear than it was who is entitled to what.