NY Lawmakers Near Deadline to Pass Bill Targeting Emerging Market ‘Vulture Funds'
(Bloomberg) -- New York state lawmakers are within days of a deadline to pass legislation targeting so-called vulture funds that has languished in the local legislature for the past two years.
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The state Assembly is expected to make a decision on the so-called Champerty bill before adjourning next Tuesday. If it doesn't pass by then, supporters will have to wait until January for the debate to resume.
The legislation, which has already passed the local senate, would bar investors from purchasing distressed debt at a deep discount with the intention of suing foreign governments after they've defaulted. It also cuts the 9% interest rate on past-due coupons on defaulted sovereign emerging-market bonds, instead matching the new rate to the going yield on one-year Treasury bills, currently at 4.08%.
After repeated failed attempts since it was first introduced in 2023, the proposal has gained momentum recently, assembly member Jessica Gonzalez-Rojas — the bill's sponsor along with state senator Liz Krueger — said in an interview. She emphasized that the goal is not to disrupt the sovereign debt industry. As of Friday, she's still trying to bring it to the chamber floor for a vote.
The bill is part of a broader, multi-year effort by New York lawmakers, nonprofits and charities to overhaul the protracted process of revamping defaulted government debt. Even as emerging economies move past a wave of post-pandemic defaults, Ethiopia and Lebanon are still negotiating on their debt. If passed, the legislation would impact roughly half — over $800 billion — of all hard currency sovereign bonds issued by developing countries.
Industry groups representing Wall Street investors have previously raised concerns over proposals focused on sovereign debt. But this year, that criticism has dimmed.
The bill 'could contribute to the ongoing international efforts to support orderly and predictable debt restructuring processes by reducing incentives for disruptive vulture fund litigation, which is a laudable goal,' a spokesperson for the International Monetary Fund said in an emailed statement. The Fund's objective is to ensure sovereign debt restructuring to be 'predictable, transparent, and orderly, and that it ultimately restores debt sustainability,' the statement added.
Still, organizations including the Securities Industry and Financial Markets Association, Creditor Rights Coalition and LSTA have in recent weeks sent letters to state lawmakers seeking to block the proposal, arguing it would have 'wide-ranging' and 'unintended negative consequences' for global financial markets.
'It will also be tremendously damaging to New York state,' said Elliot Ganz, LSTA's head of advocacy. 'You're just asking for the migration of that business to places like Texas and Florida.'
A separate bill known as the Sovereign Debt Stability Act was also reintroduced this year. It would, among other things, ramp up oversight on how defaulted government debt is restructured with creditors and cap the amount private creditors could recoup during a debt revamp. It has failed before and hasn't progressed this year.
--With assistance from Zach Williams.
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