The Leader Column

Woah! That must hurt. Cadwal-ader's dressing down at the hands of Mr Justice Jacob was not so much a bruising, rather more a steel toe-capped kick in the holiest of holies. Did Cadwalader and its client, the hedge fund Highberry, really think it could put Colt Telecom into administration? Reading the judgment, it seems crazy they even tried.

The firm must have thought there was a ghost of a chance or it wouldn't have made the move. There are numerous examples of companies, usually telecoms businesses, that have been restructured at the initial insistence of their bondholders. NTL, also a client of Cadwalader and New York's Fried Frank, after a push by bondholders, reorganised under Chapter 11 and this month emerged intact. There are also examples of companies, namely the Scottish group Atlantic Telecom – also a client of, you guessed it, Cadwalader – that have been approached early on by their bondholders to restructure. With the Atlantic management's belief that it could keep the company afloat, it pressed on ahead, straight into administration. So it cuts both ways.

The concern must be whether the Colt Telecom judgment will deter bondholders from being actively pursuing the companies they invest in. There is always the suspicion that secondary investors – or 'vulture funds' as they are affectionately known – could be attempting to push companies into administration in the hope of making a quick buck on their original discounted purchase, or that the firms which advise them could be construed as 'ambulance chasers'. But in this debt-ridden climate the more “upmarket” of fund managers are happy to sell-on the high-risk to opportunistic investors. Certainly, for these dustpan and brushes of the economy, these bonds ain't called “junk” for nothing.

More pointedly, the question remains whether the Colt judgment will deter vulture funds from stepping in to claim what belongs to them. In recent years, it certainly seems that these funds, once left out of the game on the insistence of senior lenders, have been more successful at muscling their way into the proceedings. Maybe the turning point was in 1998, when bondholders in Barings, (some of whom were represented by… Cadwalader) vetoed the proposed settlement. It certainly put activist noteholders on the map.

It also shouldn't be forgotten that junk bonds are a US invention and the Colt situation feels reminiscent of the sort of cases one might see in the States. Maybe the UK isn't ready for this kind of action. Or just doesn't want it.