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Distressed Debt Analysis : Strategies for Speculative Investors - Stephen Moyer

Distressed Debt Analysis

Strategies for Speculative Investors

Hardcover Published: 1st November 2004
ISBN: 9781932159189
Number Of Pages: 450

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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.Key FeaturesProvides investment techniques to profit from reorganizations, restructurings, and bankruptcies, including appropriate hedging and exit strategies for either short- or long-term investment horizonsExplains how to determine whether the investment objective is feasible given the capital structure of a target company and where in the capital structure to invest to achieve the investment goalIdentifies when a restructuring can be accomplished outside of a bankruptcy process and the most effective strategies and techniques to effect such changeDetails the legal and financial due diligence issues that affect investment returns to appropriately identify and quantify the investment risksIllustrates basic investment strategies and analytical techniques with case studies and references to numerous real-world examples to emphasize important concepts and critical issues

Notes on Stylep. xiii
Acknowledgmentsp. xiv
About the Authorp. xv
Web Added Valuep. xvi
Introductionp. 1
An Example of a Distressed Debt Situationp. 2
What Is Distressed Debt?p. 6
Investing in Distressed Debtp. 8
The Distressed Debt Investment Opportunityp. 13
Financial Restructurings in the 2000-2003 Erap. 14
Precursors to Defaultp. 22
Economic Performancep. 23
Relative Quantity of Low-Rated Bondsp. 25
Capital Markets Liquidityp. 28
Market Conditions That Permit Superior Returnsp. 32
Equal Access to Informationp. 33
Rational Behaviorp. 35
Low Transaction Costsp. 39
Summaryp. 41
Conceptual Overview of Financial Distress and the Restructuring Processp. 43
A Simple Model of the Firmp. 43
Extensions of the Basic Modelp. 45
A Conceptual View of Financial Distressp. 49
How Restructurings Attempt to "Fix" the Distressp. 52
Summaryp. 53
Legal Overview of Distressed Debt Restructuringsp. 55
Out-of-Court Restructurings: The Preferred Option When Effective and Feasiblep. 56
The Financial Effects of an Out-of-Court Restructuringp. 56
The Out-of-Court Restructuring Processp. 59
Parties Involvedp. 59
Strategic Considerations in Participating on the Bondholder Committeep. 61
Beginning the Processp. 64
Implementing the Restructuringp. 67
Feasibility: The Holdout Problemp. 68
Summaryp. 70
In-Court Restructurings: An Overview of the Bankruptcy Processp. 71
Declaring Bankruptcyp. 72
Jurisdiction of Filingp. 73
Timing of Filingp. 73
The Goal: The Plan of Reorganizationp. 76
The Role of Exclusivity and Prefiling Coordinationp. 76
Content and Structure of the Planp. 78
Operating Under Chapter 11p. 80
Stabilizing Operationsp. 80
Developing a Going-Forward Business Planp. 83
Determining the Assets and Liabilitiesp. 84
Determining the Valuation and the New Capital Structurep. 87
Voting on and Confirming a Plan of Reorganizationp. 89
Summaryp. 92
Overview of the Valuation Processp. 95
The Basics of Cash-Flow-Based Valuationp. 96
Using EBITDA as a Measure of Cash Flowp. 96
Understanding and Adjusting EBITDAp. 97
Limitations of EBITDAp. 102
Comparing Discounted Cash Flow and EBITDA Multiple Approachesp. 103
Comparable Company Analysis Based on Enterprise Valuep. 104
Calculating Enterprise Valuep. 105
Determining the Correct Multiplep. 109
Using Comparable Company Analysisp. 112
Alternatives to the EBITDA Multiple Approachp. 114
Revenue-Based Valuationsp. 115
Asset-Based Valuationsp. 115
Customer-Based Valuationsp. 116
Liquidation Valuationsp. 117
Summaryp. 117
Leverage and the Concepts of Credit Support and Capacityp. 119
The Interrelationship of Credit Risk and Credit Supportp. 119
Credit Riskp. 120
Credit Supportp. 120
Credit Capacityp. 121
Credit Capacity as Measured by Debt Repayment Abilityp. 123
Stable Cash Flow Scenariosp. 123
Volatile Cash Flow Scenariosp. 126
Debt Capacity Under Alternative Criteriap. 129
Asset Coveragep. 129
Ability to Refinancep. 132
Interest Expense Coveragep. 133
Capital Instruments Designed to "Avoid" Credit Capacity Criteriap. 134
Exchangeable Preferred Stockp. 135
Convertible Bondsp. 135
Discount Notes and Payment-in-Kind Notesp. 135
Summaryp. 136
Capital Structures and the Allocation and Management of Credit Riskp. 139
Using Corporate and Capital Structures to Allocate Credit Riskp. 141
Grants of Collateralp. 142
Contractual Provisionsp. 142
Maturity Structurep. 144
Corporate Structurep. 146
How Capital Structures Manage Credit Riskp. 149
Leveragep. 151
Priorityp. 151
Restricted Paymentsp. 151
Negative Pledge Clausesp. 156
Timep. 157
Performance Covenantsp. 157
Put Rightsp. 158
Forced Call in the Event of a Downgradep. 158
Performance-Linked Pricing Provisionsp. 159
Summaryp. 160
Causes of Financial Distress and the Restructuring Implicationsp. 163
Indicators of Financial Distressp. 163
Debt Ratingsp. 164
Predictive Modelsp. 166
Market Pricesp. 167
Causes of Financial Distressp. 168
Performance Materially Below Expectationp. 169
Economic Downturnp. 169
Uncompetitive Product or Servicep. 170
Unrealistic Business Planp. 172
Poor Managementp. 174
Near-Term Liquidity Issuesp. 177
Bank Debt Scenariosp. 177
No Bank Debt Scenariosp. 178
Unexpected Liabilitiesp. 180
Tort Claimsp. 180
Contract Liabilitiesp. 181
Crisis of Confidence: Fraud and Other Events That Create Financial Uncertaintyp. 183
Reliability of Historical Financial Data and Valuation Issuesp. 184
Liquidity and the Likelihood of Bankruptcyp. 185
Summaryp. 187
Options for Alleviating Financial Distress: The Company's Perspectivep. 189
Properly Assessing the Distressed Firm's Likely Actions Is Key to Assessing the Investment Outcomesp. 190
Playing the Waiting Gamep. 190
Between a Rock and a Hard Placep. 194
Summaryp. 198
Strategic Options to Resolve Financial Distress Outside Bankruptcyp. 200
Raise Additional Capitalp. 200
Asset Salesp. 201
Secured Financingsp. 202
Sale/Leaseback Financingsp. 204
Equity Sponsorsp. 204
Reducing Leveragep. 207
Open Market Repurchasesp. 207
Direct Purchases from Holdersp. 207
Cash Tender Offersp. 208
Exchange Offersp. 211
Coercive Exchange Offersp. 211
Noncoercive Exchange Offersp. 212
Constraints on the Range of Optionsp. 213
Liquidityp. 213
Time-to-Liquidity Eventp. 213
Magnitude of Problemp. 214
Complexity of Capital Structurep. 214
Severability of Business Unitsp. 215
Cause(s) of Financial Distressp. 215
Strategies When Bankruptcy Appears Necessaryp. 215
Maintaining Liquidityp. 215
Preplanned Filingsp. 216
Summaryp. 217
Profiting from Financial Distress: The Investor's Perspectivep. 219
Defining the Investment Objectivesp. 220
Tailoring a Strategy to the Investment Objectivesp. 221
Non-Chapter 11 Situationsp. 222
Passive Involvementp. 222
Active Involvementp. 224
Chapter 11 Situationsp. 228
Feasibility Considerationsp. 238
Capital Structurep. 238
Market Versus True Valuationp. 240
Market Liquidity/Concentration of Holdingsp. 241
Other Distressed Investorsp. 241
Bank Debtp. 242
Large Block Holders of Public Debtp. 242
Hedging and Capital Structure Arbitragep. 242
Return Potential of Capital Structure Arbitragep. 243
Common Capital Structure Arbitrage Tradesp. 249
Pari Passu Securities with Different Maturitiesp. 250
Senior Versus Junior Securitiesp. 252
Bonds Versus Equityp. 254
Summaryp. 256
Practical Aspects of the Investment Process and Due Diligencep. 257
Practical Realities of the Investment Analysis Processp. 258
Screening Situations to Prioritize Opportunitiesp. 258
Reacting to Volatile Situationsp. 260
A Time-Efficient Valuation Methodologyp. 260
Performing Due Diligencep. 262
Diligence Cost-Benefit Analysisp. 262
Prioritizing the Diligence Issuesp. 263
Financial Due Diligencep. 267
Basic Goals of Financial Due Diligencep. 267
Obtaining Publicly Available Financial Informationp. 268
Accessing Managementp. 270
Special Valuation Considerations in Financially Distressed Contextsp. 272
Business Deterioration During a Reorganizationp. 272
Reorganization Costsp. 273
Critical Vendor Paymentsp. 273
Cash Accumulation During the Reorganizationp. 275
Tax Issuesp. 276
Liquidity Implications of a Distressed Firm's Current Tax Statusp. 277
Potential Value from Carryforward of Net Operating Lossesp. 279
Priority Status of Tax Claimsp. 284
Legal Due Diligencep. 284
Obtaining the Relevant Documentsp. 285
Checklist of Legal and Bankruptcy-Related Issues to Considerp. 286
Voidable Preferencesp. 287
Substantive Consolidationp. 287
Structural Advantagesp. 288
Equitable Subordinationp. 289
Zone of Insolvencyp. 292
Special Considerations When Investing in Claims That Are Not Negotiable Instrumentsp. 292
Recent Developments Under the Sarbanes-Oxley Act of 2002p. 295
Mechanics of Accumulating the Investmentp. 296
Investment Strategy and Market Environment Drive Accumulation Approachp. 297
Consummating the Tradep. 300
Firm Marketp. 302
No Market or Above-Market Offeringp. 303
Settling the Tradep. 304
Bank Debtp. 305
Holder Identityp. 305
Settlementp. 305
Special Considerations for Revolving Loansp. 306
Summaryp. 307
Dynamics of the Workout Process: The Endgamep. 309
The Partiesp. 310
The Debtorp. 310
Debtor's Bankruptcy Counselp. 311
Debtor's Financial Advisorp. 311
The Committeep. 311
Committee Legal Counselp. 313
Committee Financial Advisorp. 314
The Secured Creditorsp. 314
The Bankruptcy Judgep. 315
Types of Chapter 11 Casesp. 316
Preplanned Restructuringp. 318
Full Prepackp. 318
Prenegotiated Filingsp. 320
Asset Salesp. 321
Sales Intended to Enhance Recoveries by Maximizing Estate Valuep. 322
Sales Designed to Maximize Creditor Recoveriesp. 326
Free-Fall and Contested Chapter 11 Reorganizationsp. 326
Sources of Leverage in the Chapter 11 Processp. 327
Delayp. 328
Management and the Right of Exclusivityp. 329
Creditors and the Threat of Litigationp. 331
Priorityp. 332
Secured Creditorsp. 335
Valuationp. 336
Voting and Confirmationp. 339
Votingp. 339
Confirmationp. 341
Summaryp. 346
Postreorganization Considerationsp. 349
Postreorganization Equitiesp. 350
Size of Expected or Probable Market Capitalizationp. 350
Postreorganization Trading Floatp. 352
Forced Sellersp. 353
Company Profilep. 354
Postconfirmation Lockupsp. 355
Tax-Based Trading Restrictionsp. 356
Warrantsp. 356
Trading Performance of Back-End Equitiesp. 356
Postreorganization Debt Securitiesp. 359
Liquidating Trustsp. 360
Summaryp. 365
Endotesp. 367
Literature Survey and Selected Referencesp. 405
Chess Notation and Game Movesp. 433
Disclosure of Possible Conflicts of Interestp. 435
Indexp. 437
Table of Contents provided by Rittenhouse. All Rights Reserved.

ISBN: 9781932159189
ISBN-10: 1932159185
Series: J Ross Publishing
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 450
Published: 1st November 2004
Publisher: J Ross Publishing
Country of Publication: US
Dimensions (cm): 22.86 x 15.24  x 2.54
Weight (kg): 0.73