Distress Investing – Principles and Technique Principles and Technique

A comprehensive guide to distress investing around the world

Increasingly, corporate rehabilitation is more interesting than corporate liquidation to governments and capital markets. Following this trend, a mezzanine industry of mutual funds, hedge funds, and private investors has stepped up to fill the role of the traditional corporate lender. Distress Investing puts this topic in perspective and covers the essential aspects of this discipline-from its theoretical underpinnings to its practical applications. The book features cases studies of some of the biggest distress investing situations, including Kmart and Pacific Gas & Electric. From the recent changes to U.S. bankruptcy code and creditor rights to cash bailouts, readers will learn how to analyze distressed situations such as pricing issues, arbitrage opportunities, tax disadvantages, and the reorganization of funding plans. Written by the leading practitioner of distress investing and coauthored by a leading academic in the field, this book is certain to become the bible on this topic for professional investors and students alike.

Martin J. Whitman (New York, NY) is Chairman and Co-CIO of Third Avenue Management LLC. He is also the author of Value Investing (978-0-471-16292-6) and The Aggressive Conservative Investor (978-0-471-76805-0), from Wiley. Fernando Diz (Syracuse, NY) is the Martin J. Whitman Associate Professor of Finance and Director of The Ballentine Investment Institute at Syracuse University.

Distress Investing is a comprehensive guide to distress investing around the world. Increasingly, corporate rehabilitation is more interesting than corporate liquidation to governments and capital markets. And increasingly a mezzanine industry of mutual funds, hedge funds, and private investors has stepped up to fill the role of the traditional corporate lender. This book covers distress investing from theoretical underpinnings to practical applications. It features cases studies of some of the biggest distress investing situations including Kmart and Pacific Gas & Electric. From the recent changes to U.S. bankruptcy code to creditor rights to cash bailouts, readers will learn how to analyze distressed situations including pricing issues, arbitrage opportunities, political and tax disadvantages to deal expenses and reorganization funding plans. Written by the leading practitioner of distress investing and co-authored by teaching academics, this book is certain to become the bible on the topic for professional investors and students.

Foreword. Preface. Acknowledgments. Part One: The General Landscape of Distress Investing. Chapter 1: The Changed Environment. Trends in Corporate Debt Growth and Leverage before the Financial Meltdown of 2007-2008. Junk Bonds and the Levering-up Period. The Syndicated Loan Market and Leveraged Loans. The Financial Meltdown of 2007-2008. The Principal 2005 Bankruptcy Amendment as they Affect Chapter 11 Reorganizations of Business. Chapter 2: The Theoretical Underpinning. What market? Towards a general theory of market efficiency. The External Forces Influencing Markets Explained. What risk? Capital structure and credit risk. Valuation. The company as a stand-alone. Control and its vital importance. Chapter 3: The Causes of Financial Distress. Lack of access to capital markets. Deterioration of operating performance. Deterioration of GAAP performance. Large off-balance sheet contingent liabilities. Chapter 4: Deal Expenses and Who Bears Them. Attorneys and Financial Advisers' compensation structure and the distribution of the fee pie. Time in Chapter 11 and the number of legal firms retained. The determinants of legal fees and expenses. The determinants of financial advisers fees and expenses. Can professional costs be excessive? Appendix. Chapter 5: Other Important Issues. Management compensation and entrenchment. Tax and political disadvantages. Chapter 6: The Five Basic Truths of Distress Investing. Truth 1: No one can take away a corporate creditors right to a money payment outside of Chapter 11 or Chapter 7. Truth 2: Chapter 11 rules influence all reorganizations. Truth 3: Substantive characteristics of securities. Truth 4: Restructurings are costly for creditors. Truth 5: Creditors have only contractual rights. Part Two: Restructuring Troubled Issuers. Chapter 7: Voluntary Exchanges. Voluntary Exchanges. The holdout problem illustrated. Making a voluntary exchange work. Tax Disadvantages of a Voluntary Exchange vs. Chapter 11 Reorganization. Chapter 8: A Brief Review of Chapter 11. Liquidations and reorganizations. Starting a case: Voluntary vs. Involuntary petitions. Forum shopping. The parties in a Chapter 11 case. The administration of a Chapter 11 case. The Chapter 11 Plan. Chapter 9: The Workout Process. Parties and their differing needs and desires. Types of Chapter 11 Cases. Leverage factors in Chapter 11. Part Three: The Investment Process. Chapter 10: How to Analyze: Valuation. Strict Going Concern Valuation. Resource conversion valuation. Liquidation valuations. Chapter 11: Due Diligence for Distressed Issues. Chapter 12: Distress Investing Risks. Risks associated with the alteration of priorities. Other risks. Chapter 13: Form of Considerations vs. Amount of Consideration. Part Four: Cases and Implications for Public Policy. Chapter 14: Brief Case Studies of Distressed Securities 2008-2009. Performing Loans Likely to Remain Performing Loans. Small Cases. Large Cases. Capital Infusions into Troubled Companies. Chapter 15: A Small Case: Home Products International. The early years. Growth by acquisitions. Retail industry woes. The fight for control. Amendment of indenture and event of default. The decision: Prepackaged Chapter 11. Treatment of impaired classes under the Plan. Financial means for implementation of the Plan. Going concern and liquidation valuations. Chapter 16: A Large Reorganization Case: Kmart Corporation. Landlords and Unexpired Leases. Vendors and Critical Vendor Motions. Management and KERPs pre 2005 BAPCPA. Fraudulent Transfers. Subsidiary Guarantees and Substantive Consolidation. Chapter 11 committees and out of control professional costs. Blocking positions. Buying claims in Chapter 11. DIP Financing. Kmart's Plan of Reorganization and Plan Investors. Investment Performance. Chapter 17: An Ideal Restructuring System. Feasibility and Cash Bailouts. Good Enough Rather Than Ideal. Highly Beneficial Elements in the U.S. Restructuring System. The Goals of an Ideal Restructuring System. Suggested Reforms. About the Authors. Notes. Index.