Vulture funds circle ailing housebuilders

By Elena Moya

LONDON (Reuters) - Vulture funds are circling housebuilders as their debt and equity prices plunge, debt traders said, hoping for rich pickings as a 10-year boom in the sector is ended by an economic slowdown.

The funds, which look for profit in distressed assets, have been attracted by prices as low as 20 pence in the pound for the debt of some of Britain's well known housebuilders, one trader said.

Discounts offered at banks such as Lehman (LEH.N: Quote, Profile, Research), Deutsche Bank (DBKGn.DE: Quote, Profile, Research) or Merrill Lynch MER.L average about 50 percent, distressed traders said.

"In due course, I would expect the debt to trade down significantly," said Peter Baldwin, a partner at law firm Jones Day, which specialises in debt restructurings.

Vulture funds buy cheap debt in the hope its value will increase in the short to medium term. Others look for companies in danger of breaching bank loan covenants that open up the opportunity to gain control through a debt-for-equity swap.

The vulture funds are currently focusing on leverage buy-outs -- acquisitions that are largely financed by debt -- as they are more vulnerable to the credit crunch.

Housebuilders Crest Nicholson and McCarthy & Stone are two examples where funds are offering to take the debt off the books from the original lenders, the trading sources said.

Crest Nicholson Plc became a private company last year, when it was acquired by Castle Bidco Ltd, a 50-50 joint venture between HBOS (HBOS.L: Quote, Profile, Research) and West Coast Capital.