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Distressed Debt Analysis

Strategies for Speculative Investors

By: Stephen Moyer

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Hardcover | 1 November 2004

At a Glance

Hardcover
448 Pages

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22.9 x 15.2 x 3

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$290.75

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Providing theoretical and practical insight, Distressed Debt Analysis: Strategies for Speculative Investors presents a conceptual, but not overly technical, outline of the financial and bankruptcy law context in which restructurings take place. The book covers the broader financial environment of the reorganization and the basic process of investment analysis and investment strategies. The author uses numerous real-world examples and case studies to emphasize important concepts and critical issues. The developments that have created these extraordinary investment opportunities have also created tremendous demand for professionals with experience and knowledge in the restructuring process. Distressed Debt Analysis: Strategies for Speculative Investors addresses the complete knowledge needs of investors and professionals in the burgeoning world of financially distressed companies. It is perfect for financial analysts, portfolio managers, bankruptcy departments of law firms, restructuring advisory groups, turnaround consulting firms, and reorganization and distressed securities departments of investment banks.

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You Can Find This Book In

Non-Fiction Law Laws of Specific Jurisdictions Financial Law Bankruptcy & Insolvency Accounting & Finance Finance Corporate Finance Investment & Securities Self-Help, Personal Development & Practical Advice Personal Finance Economics

Notes on Style	p. xiii
Acknowledgments	p. xiv
About the Author	p. xv
Web Added Value	p. xvi
Introduction	p. 1
An Example of a Distressed Debt Situation	p. 2
What Is Distressed Debt?	p. 6
Investing in Distressed Debt	p. 8
The Distressed Debt Investment Opportunity	p. 13
Financial Restructurings in the 2000-2003 Era	p. 14
Precursors to Default	p. 22
Economic Performance	p. 23
Relative Quantity of Low-Rated Bonds	p. 25
Capital Markets Liquidity	p. 28
Market Conditions That Permit Superior Returns	p. 32
Equal Access to Information	p. 33
Rational Behavior	p. 35
Low Transaction Costs	p. 39
Summary	p. 41
Conceptual Overview of Financial Distress and the Restructuring Process	p. 43
A Simple Model of the Firm	p. 43
Extensions of the Basic Model	p. 45
A Conceptual View of Financial Distress	p. 49
How Restructurings Attempt to "Fix" the Distress	p. 52
Summary	p. 53
Legal Overview of Distressed Debt Restructurings	p. 55
Out-of-Court Restructurings: The Preferred Option When Effective and Feasible	p. 56
The Financial Effects of an Out-of-Court Restructuring	p. 56
The Out-of-Court Restructuring Process	p. 59
Parties Involved	p. 59
Strategic Considerations in Participating on the Bondholder Committee	p. 61
Beginning the Process	p. 64
Implementing the Restructuring	p. 67
Feasibility: The Holdout Problem	p. 68
Summary	p. 70
In-Court Restructurings: An Overview of the Bankruptcy Process	p. 71
Declaring Bankruptcy	p. 72
Jurisdiction of Filing	p. 73
Timing of Filing	p. 73
The Goal: The Plan of Reorganization	p. 76
The Role of Exclusivity and Prefiling Coordination	p. 76
Content and Structure of the Plan	p. 78
Operating Under Chapter 11	p. 80
Stabilizing Operations	p. 80
Developing a Going-Forward Business Plan	p. 83
Determining the Assets and Liabilities	p. 84
Determining the Valuation and the New Capital Structure	p. 87
Voting on and Confirming a Plan of Reorganization	p. 89
Summary	p. 92
Overview of the Valuation Process	p. 95
The Basics of Cash-Flow-Based Valuation	p. 96
Using EBITDA as a Measure of Cash Flow	p. 96
Understanding and Adjusting EBITDA	p. 97
Limitations of EBITDA	p. 102
Comparing Discounted Cash Flow and EBITDA Multiple Approaches	p. 103
Comparable Company Analysis Based on Enterprise Value	p. 104
Calculating Enterprise Value	p. 105
Determining the Correct Multiple	p. 109
Using Comparable Company Analysis	p. 112
Alternatives to the EBITDA Multiple Approach	p. 114
Revenue-Based Valuations	p. 115
Asset-Based Valuations	p. 115
Customer-Based Valuations	p. 116
Liquidation Valuations	p. 117
Summary	p. 117
Leverage and the Concepts of Credit Support and Capacity	p. 119
The Interrelationship of Credit Risk and Credit Support	p. 119
Credit Risk	p. 120
Credit Support	p. 120
Credit Capacity	p. 121
Credit Capacity as Measured by Debt Repayment Ability	p. 123
Stable Cash Flow Scenarios	p. 123
Volatile Cash Flow Scenarios	p. 126
Debt Capacity Under Alternative Criteria	p. 129
Asset Coverage	p. 129
Ability to Refinance	p. 132
Interest Expense Coverage	p. 133
Capital Instruments Designed to "Avoid" Credit Capacity Criteria	p. 134
Exchangeable Preferred Stock	p. 135
Convertible Bonds	p. 135
Discount Notes and Payment-in-Kind Notes	p. 135
Summary	p. 136
Capital Structures and the Allocation and Management of Credit Risk	p. 139
Using Corporate and Capital Structures to Allocate Credit Risk	p. 141
Grants of Collateral	p. 142
Contractual Provisions	p. 142
Maturity Structure	p. 144
Corporate Structure	p. 146
How Capital Structures Manage Credit Risk	p. 149
Leverage	p. 151
Priority	p. 151
Restricted Payments	p. 151
Negative Pledge Clauses	p. 156
Time	p. 157
Performance Covenants	p. 157
Put Rights	p. 158
Forced Call in the Event of a Downgrade	p. 158
Performance-Linked Pricing Provisions	p. 159
Summary	p. 160
Causes of Financial Distress and the Restructuring Implications	p. 163
Indicators of Financial Distress	p. 163
Debt Ratings	p. 164
Predictive Models	p. 166
Market Prices	p. 167
Causes of Financial Distress	p. 168
Performance Materially Below Expectation	p. 169
Economic Downturn	p. 169
Uncompetitive Product or Service	p. 170
Unrealistic Business Plan	p. 172
Poor Management	p. 174
Near-Term Liquidity Issues	p. 177
Bank Debt Scenarios	p. 177
No Bank Debt Scenarios	p. 178
Unexpected Liabilities	p. 180
Tort Claims	p. 180
Contract Liabilities	p. 181
Crisis of Confidence: Fraud and Other Events That Create Financial Uncertainty	p. 183
Reliability of Historical Financial Data and Valuation Issues	p. 184
Liquidity and the Likelihood of Bankruptcy	p. 185
Summary	p. 187
Options for Alleviating Financial Distress: The Company's Perspective	p. 189
Properly Assessing the Distressed Firm's Likely Actions Is Key to Assessing the Investment Outcomes	p. 190
Playing the Waiting Game	p. 190
Between a Rock and a Hard Place	p. 194
Summary	p. 198
Strategic Options to Resolve Financial Distress Outside Bankruptcy	p. 200
Raise Additional Capital	p. 200
Asset Sales	p. 201
Secured Financings	p. 202
Sale/Leaseback Financings	p. 204
Equity Sponsors	p. 204
Reducing Leverage	p. 207
Open Market Repurchases	p. 207
Direct Purchases from Holders	p. 207
Cash Tender Offers	p. 208
Exchange Offers	p. 211
Coercive Exchange Offers	p. 211
Noncoercive Exchange Offers	p. 212
Constraints on the Range of Options	p. 213
Liquidity	p. 213
Time-to-Liquidity Event	p. 213
Magnitude of Problem	p. 214
Complexity of Capital Structure	p. 214
Severability of Business Units	p. 215
Cause(s) of Financial Distress	p. 215
Strategies When Bankruptcy Appears Necessary	p. 215
Maintaining Liquidity	p. 215
Preplanned Filings	p. 216
Summary	p. 217
Profiting from Financial Distress: The Investor's Perspective	p. 219
Defining the Investment Objectives	p. 220
Tailoring a Strategy to the Investment Objectives	p. 221
Non-Chapter 11 Situations	p. 222
Passive Involvement	p. 222
Active Involvement	p. 224
Chapter 11 Situations	p. 228
Feasibility Considerations	p. 238
Capital Structure	p. 238
Market Versus True Valuation	p. 240
Market Liquidity/Concentration of Holdings	p. 241
Other Distressed Investors	p. 241
Bank Debt	p. 242
Large Block Holders of Public Debt	p. 242
Hedging and Capital Structure Arbitrage	p. 242
Return Potential of Capital Structure Arbitrage	p. 243
Common Capital Structure Arbitrage Trades	p. 249
Pari Passu Securities with Different Maturities	p. 250
Senior Versus Junior Securities	p. 252
Bonds Versus Equity	p. 254
Summary	p. 256
Practical Aspects of the Investment Process and Due Diligence	p. 257
Practical Realities of the Investment Analysis Process	p. 258
Screening Situations to Prioritize Opportunities	p. 258
Reacting to Volatile Situations	p. 260
A Time-Efficient Valuation Methodology	p. 260
Performing Due Diligence	p. 262
Diligence Cost-Benefit Analysis	p. 262
Prioritizing the Diligence Issues	p. 263
Financial Due Diligence	p. 267
Basic Goals of Financial Due Diligence	p. 267
Obtaining Publicly Available Financial Information	p. 268
Accessing Management	p. 270
Special Valuation Considerations in Financially Distressed Contexts	p. 272
Business Deterioration During a Reorganization	p. 272
Reorganization Costs	p. 273
Critical Vendor Payments	p. 273
Cash Accumulation During the Reorganization	p. 275
Tax Issues	p. 276
Liquidity Implications of a Distressed Firm's Current Tax Status	p. 277
Potential Value from Carryforward of Net Operating Losses	p. 279
Priority Status of Tax Claims	p. 284
Legal Due Diligence	p. 284
Obtaining the Relevant Documents	p. 285
Checklist of Legal and Bankruptcy-Related Issues to Consider	p. 286
Voidable Preferences	p. 287
Substantive Consolidation	p. 287
Structural Advantages	p. 288
Equitable Subordination	p. 289
Zone of Insolvency	p. 292
Special Considerations When Investing in Claims That Are Not Negotiable Instruments	p. 292
Recent Developments Under the Sarbanes-Oxley Act of 2002	p. 295
Mechanics of Accumulating the Investment	p. 296
Investment Strategy and Market Environment Drive Accumulation Approach	p. 297
Consummating the Trade	p. 300
Firm Market	p. 302
No Market or Above-Market Offering	p. 303
Settling the Trade	p. 304
Bank Debt	p. 305
Holder Identity	p. 305
Settlement	p. 305
Special Considerations for Revolving Loans	p. 306
Summary	p. 307
Dynamics of the Workout Process: The Endgame	p. 309
The Parties	p. 310
The Debtor	p. 310
Debtor's Bankruptcy Counsel	p. 311
Debtor's Financial Advisor	p. 311
The Committee	p. 311
Committee Legal Counsel	p. 313
Committee Financial Advisor	p. 314
The Secured Creditors	p. 314
The Bankruptcy Judge	p. 315
Types of Chapter 11 Cases	p. 316
Preplanned Restructuring	p. 318
Full Prepack	p. 318
Prenegotiated Filings	p. 320
Asset Sales	p. 321
Sales Intended to Enhance Recoveries by Maximizing Estate Value	p. 322
Sales Designed to Maximize Creditor Recoveries	p. 326
Free-Fall and Contested Chapter 11 Reorganizations	p. 326
Sources of Leverage in the Chapter 11 Process	p. 327
Delay	p. 328
Management and the Right of Exclusivity	p. 329
Creditors and the Threat of Litigation	p. 331
Priority	p. 332
Secured Creditors	p. 335
Valuation	p. 336
Voting and Confirmation	p. 339
Voting	p. 339
Confirmation	p. 341
Summary	p. 346
Postreorganization Considerations	p. 349
Postreorganization Equities	p. 350
Size of Expected or Probable Market Capitalization	p. 350
Postreorganization Trading Float	p. 352
Forced Sellers	p. 353
Company Profile	p. 354
Postconfirmation Lockups	p. 355
Tax-Based Trading Restrictions	p. 356
Warrants	p. 356
Trading Performance of Back-End Equities	p. 356
Postreorganization Debt Securities	p. 359
Liquidating Trusts	p. 360
Summary	p. 365
Endotes	p. 367
Literature Survey and Selected References	p. 405
Chess Notation and Game Moves	p. 433
Disclosure of Possible Conflicts of Interest	p. 435
Index	p. 437
Table of Contents provided by Rittenhouse. All Rights Reserved.

Distressed Debt Analysis

Strategies for Speculative Investors

At a Glance

Hardcover

Shipping

How to return your order

Defective items

You Can Find This Book In

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