Affiliate Purchases of Discounted Debt – Can You Capture High Returns?

January 07, 2009
Private equity and hedge fund managers looking to buy debt issued by portfolio companies of their investment funds seek equity-like returns. When the purchaser is an affiliate of the debtor, however, there are several pitfalls. The terms of the debt and legal principles may deny an affiliate purchaser the expected rights and the tax consequences can be unexpectedly unpleasant. This update examines some of the complications that may arise with affiliate debt purchases and summarizes the actions that purchasers can take to minimize these issues.