Vulture funds close in as Martinsa Fadesa falls

By Elena Moya

LONDON (Reuters) - Spanish property firm Martinsa Fadesa's (MFAD.MC: Quote, Profile, Research) demise is a sign hedge funds are pushing hard to make profits out of ailing companies and may cause insolvencies in Spain to speed up.

Hedge funds which bought Martinsa Fadesa debt at discounts of as much as 50 percent of its value could now profit from its administration process, because an expected sale of assets may pay them back at a price closer to face value.

Martinsa Fadesa said on Monday it would file for administration after it failed to raise funds and meet debt payments, marking one of the biggest corporate failures in the country's history.

Such vulture funds may not care if a company goes bust, teaching Spanish companies -- used to cosy long-time relationships with regional savings banks such as La Caixa -- a painful lesson in modern finance.

"There will be more of these companies. Spain is completely unprepared for what's going to hit them," said Mark Fennessy, a restructuring partner at Orrick, a London law firm.

"There are a number of funds, large private equity funds, that are already in discussions with Spanish banks to take out their debt and equity positions in distressed companies. We will see an increase in this activity."

From their London offices in upscale areas such as Mayfair or Marylebone, vulture funds circle companies, especially those that have been bought using large amounts of leverage as they are more vulnerable to the credit crunch.

They profit by swapping debt for equity, which can give them control of a company, or by selling the debt if the price goes up, or by the sale of assets in a liquidation.