The Real Deal New York

Hedge funds looking for big payday on defaulted mortgage bonds

Prosiris and Tilden Park sued to get share of $8.5B settlement

August 24, 2016 01:16PM

Reza Ali and Joshua Birnbaum

Reza Ali and Joshua Birnbaum

Two hedge fund managers are hoping for a big payday on defaulted pre-crisis mortgage bonds by capitalizing on legal fine print.

The funds, Prosiris Capital Management and Tilden Park Capital Management, bought defaulted bonds issued prior to the 2008 crash by Countrywide Financial Corp, now part of Bank of America. In 2011, Bank of America settled with the bond investors, agreeing to pay $8.5 billion to cover their losses. Most of that money has been distributed to investors like BlackRock and AIG, but around $600 million has yet to be spent.

Normally the money would go to the owners of more senior bond tranches. But in a lawsuit, Prosiris and Tilden Park argue that language in the settlement indicates more junior bonds, which they bought at steep discounts in 2012 and 2013, should be paid off first. If their lawsuit is successful, the funds can expect to collect the vast majority of the $600 million pot and make double-digit returns – to the detriment of the owners of senior bonds.

“They saw an opportunity in the market and capitalized on it,” the Steve Molo, a lawyer representing the hedge funds. [WSJ]Konrad Putzier

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