(Reuters) - In the past two decades, a group of specialized hedge funds have transformed corporate bankruptcies, injecting much-needed capital while at the same time drawing fire as "vultures."
Now these same funds may be poised to descend on another landscape: struggling cities and counties - and no place beckons more than Detroit.
This sudden interest in the staid world of municipal debt comes as these so-called distressed funds are looking for new places to put their money. Lucrative corporate bankruptcies have dried up, thanks in part to the Federal Reserve's policy of low interest rates.
Of course, these hedge funds may be deterred by the financial and political constraints of local governments, which must pay police and collect trash and cannot be forced into liquidation.
But despite the risks, some are already betting hundreds of millions of dollars that there are big returns in cash-strapped governments.
Monarch Alternative Capital, which played a major role in the bankruptcy of Twinkie-maker Hostess Brands Inc, and several other funds have scooped up more than $600 million of debts of Jefferson County, Alabama, according to court records.
But nowhere is attracting more attention than Detroit.
With $8.6 billion in long-term debt, Detroit would be comparable to the biggest corporate failures if it eventually files for bankruptcy, a major advantage for big hedge funds that are used to investing hundreds of millions of dollars at a time.
The sheer size of Detroit's debt should make it easier for the funds to track down very large chunks of bonds, magnifying their profit potential, cutting their research and advisory costs and giving them leverage when it comes to restructuring talks.
Bill Nowling, a spokesman for the city's emergency manager, Kevyn Orr, said the city is still assessing its approach to its financial turnaround and said he was not aware of any contact with potential hedge fund investors.
Detroit was once America's fifth largest city and a thriving center of U.S. industry. Now, its population has plummeted to 700,000 from a peak of 1.8 million, a third live in poverty and basic services such as street lighting have broken down. Michigan Governor Rick Snyder appointed Orr, a corporate bankruptcy expert, in March to take over the city's finances.
Even if the city does not file for bankruptcy, its debt will likely be restructured, providing an opportunity for hedge funds to make a profit.