A preliminary agreement between Iceland and creditors of three
failed banks could pave the way to a resolution of one of the most
popular bets for U.S. hedge funds to come out of the financial
crisis.
Iceland's government on Monday announced deals with steering
committees representing creditors of three banks that foundered in
November 2010. The agreements hinged on turning over some of the
banks' money and assets to Iceland's populist government, while
leaving large enough recoveries for the hedge funds, some of which
have held the debt for years. Under the draft restructurings,
creditors of Kaupthing Bank hf, Glitnir Bank hf and LBI hf would be
repaid with combinations of cash, new bonds and bank shares.
The steering committee for Kaupthing includes Abrams Capital
Management LP, Centerbridge Partners LP, Och-Ziff Capital
Management Group, Taconic Capital Advisors LP and York Capital
Management, a person familiar with the matter said. The leaders of
the Glitner creditor group include Davidson Kempner Capital
Management and Silver Point Capital LP, according to people
familiar with the matter.
The steering groups comprised some of the largest holders of the
bank debt, who signed confidentiality agreements and accepted
trading restrictions during negotiations, the people familiar with
the matter said. The plans are now being presented to all creditors
who must ultimately vote on them.
The government is pressuring creditors to agree by threatening
to apply a 39% exit tax to creditors not participating in the
state-sanctioned agreements. If creditors ratify the restructuring
they can expect to pay about half that amount to the government, a
person involved in the talks said.
At least 70 hedge funds not involved in the negotiations hold
Icelandic bank claims and most of them are still analyzing the
complex restructuring proposals. Prices of the claims rose about
one-and-a-half percentage points on the announcement with Glitnir
claims quoted at 35.25% of face value and Kaupthing
euro-denominated claims quoted at 25.25%, a trader said.
Hedge funds that specialize in distressed debt snapped up
Icelandic bank claims as early as 2010 when the country's banking
system collapsed. While other casualties of the financial crisis
were eventually liquidated or bailed out, and creditors were
repaid, Iceland's insolvent banks remained in the limbo created by
the island nation's capital controls.
Some large hedge funds such as Elliott Management Corp. and
Paulson & Co. Inc. bought into the claims, then sold some or
all of their holdings as Iceland's government refused to negotiate
directly with creditors and waged a publicity campaign against
them.
The glacial pace of restructuring thawed about seven months ago,
when the governmental task forces assigned to the bank workouts
began regular talks with lawyers and financial advisers to the
hedge funds, according to a person familiar with the matter. The
government became more focused on a resolution as momentum grew
domestically to release the capital controls that had been
dampening economic growth.
A breakthrough in negotiations came in May when the Kaupthing
creditor committee proposed a plan that set the framework for the
ultimate agreement, people familiar with the matter say.
Write to Matt Wirz at matthieu.wirz@wsj.com
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