Funds bought M Fadesa debt from M Stanley -sources

By Elena Moya

LONDON, July 18 (Reuters) - "Vulture funds" bought debt in Spain's Martinsa Fadesa (MFAD.MC: Quote, Profile, Research, Stock Buzz), now in administration, from U.S. bank Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) in the secondary market, sources familiar with the situation said on Friday.

Morgan Stanley sold some of its loans in Fadesa, the largest Spanish property firm, to reduce its risk, the sources said.

Distressed debt funds, including some from Morgan Stanley, Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), Japan's Shinsei Bank, Citigroup (C.N: Quote, Profile, Research, Stock Buzz), and Collateralised Debt Obligation fund Coltrane, bought Fadesa debt at discounts of as much as 50 percent, a source involved in the company's administration said on condition of anonymity.

Morgan Stanley, Lehman and Citigroup declined to comment, while Coltrane and Shinsei could not immediately be reached.

"There are a number of funds of private equity and hedge funds that have raised capital to take advantage of these opportunities," said Mark Fennessy, a restructuring partner at Orrick, a law firm in London.

"Access to capital is at a premium, and often investment banks need to sell risk-weighted assets in order to ensure that they have sufficient capital resources," he said.

In Fadesa's case, it was the hedge funds -- not Spain's regional banks, which are used to cosy relationships with their clients -- that imposed tough conditions on a refinancing deal earlier this year aimed at saving the company from insolvency.

The conditions included the approval of a 150 million euro loan from a Spanish government body, a source involved in the deal said. The denial of that loan ultimately led to the company's filing for administration.