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Martin J. Whitman is Chairman and co-CIO of Third Avenue Management LLC. He has taught courses in value investing and distressed investing for the past thirty years at the Schools of Management at both Syracuse University and Yale University. Whitman is also the author of the Wiley titles Value Investing and The Aggressive Conservative Investor.
Fernando Diz is the Martin J. Whitman Associate Professor of Finance and Director of the Ballentine Investment Institute at Syracuse University. His research specialties are in the areas of trading, derivative securities, and value and distress investing. Diz has written for the Journal of Futures Markets, the Review of Financial Studies, and the Journal of Alternative Investments.
Foreword | p. xiii |
Preface | p. xv |
Acknowledgments | p. xxii |
The General Landscape of Distress Investing | |
The Changed Environment | p. 3 |
Trends in Corporate Debt Growth and Leverage before the Financial Meltdown of 2007-2008 | p. 4 |
Junk Bonds and the Levering-Up Period | p. 6 |
The Syndicated Loan Market and Leveraged Loans | p. 12 |
Financial Meltdown of 2007-2008 | p. 16 |
Principal Provisions of the 2005 Bankruptcy Act as They Affect Chapter 11 Reorganizations of Businesses | p. 22 |
The Theoretical Underpinning | p. 27 |
What Market? | p. 27 |
Toward a General Theory of Market Efficiency | p. 29 |
External Forces Influencing Markets Explained | p. 32 |
What Risk? | p. 34 |
Capital Structure and Credit Risk | p. 38 |
Valuation | p. 39 |
The Company as a Stand-Alone Entity | p. 41 |
Control and Its Vital Importance | p. 42 |
The Causes of Financial Distress | p. 43 |
Lack of Access to Capital Markets | p. 44 |
Deterioration of Operating Performance | p. 46 |
Deterioration of GAAP Performance | p. 48 |
Large Off-Balance-Sheet Contingent Liabilities | p. 51 |
Deal Expenses and Who Bears Them | p. 53 |
Attorneys and Financial Advisers' Compensation Structure and the Distribution of the Fee Pie | p. 54 |
Time in Chapter 11 and Number of Legal Firms Retained | p. 66 |
Determinants of Legal Fees and Expenses | p. 67 |
Determinants of Financial Advisers' Fees and Expenses | p. 68 |
Can Professional Costs Be Excessive? | p. 68 |
Appendix | p. 69 |
Other Important Issues | p. 71 |
Management Compensation and Entrenchment | p. 71 |
Tax and Political Disadvantages | p. 73 |
The Five Basic Truths of Distress Investing | p. 77 |
No One Can Take Away a Corporate Creditor's Right to a Money Payment Outside of Chapter 11 or Chapter 7 | p. 78 |
Chapter 11 Rules Influence All Reorganizations | p. 82 |
Substantive Characteristics of Securities | p. 84 |
Restructurings Are Costly for Creditors | p. 86 |
Creditors Have Only Contractual Rights | p. 87 |
Restructuring Troubled Issuers | |
Voluntary Exchanges | p. 91 |
Problems with Voluntary Exchanges | p. 92 |
The Holdout Problem Illustrated | p. 93 |
Making a Voluntary Exchange Work | p. 94 |
Tax Disadvantages of a Voluntary Exchange versus Chapter 11 Reorganization | p. 95 |
A Brief Review of Chapter 11 | p. 99 |
Liquidations and Reorganizations | p. 100 |
Starting a Case: Voluntary versus Involuntary Petitions | p. 100 |
Forum Shopping | p. 101 |
Parties in a Chapter 11 Case | p. 101 |
Administration of a Chapter 11 Case | p. 103 |
The Chapter 11 Plan | p. 109 |
The Workout Process | p. 117 |
Parties and Their Differing Needs and Desires | p. 117 |
Types of Chapter 11 Cases | p. 120 |
Leverage Factors in Chapter 11 | p. 125 |
The Investment Process | |
How to Analyze: Valuation | p. 133 |
Strict Going Concern Valuation | p. 134 |
Resource Conversion Valuation | p. 146 |
Liquidation Valuations | p. 148 |
Due Diligence for Distressed Issues | p. 151 |
Distress Investing Risks | p. 157 |
Risks Associated with the Alteration of Priorities | p. 158 |
Risks Associated with Collateral or Enterprise Valuation | p. 165 |
Reorganization Risks | p. 168 |
Other Risks | p. 168 |
Form of Consideration versus Amount of Consideration | p. 171 |
Cases and Implications for Public Policy | |
Brief Case Studies of Distressed Securities, 2008-2009 | p. 177 |
Performing Loans Likely to Remain Performing Loans | p. 178 |
Small Cases | p. 182 |
Large Cases | p. 184 |
Capital Infusions into Troubled Companies | p. 184 |
A Small Case: Home Products International | p. 187 |
The Early Years | p. 188 |
Growth by Acquisitions | p. 189 |
Retail Industry Woes | p. 192 |
The Fight for Control | p. 195 |
Amendment of Indenture and Event of Default | p. 196 |
The Decision: Prepackaged Chapter 11 | p. 197 |
Treatment of Impaired Classes under the Plan | p. 198 |
Financial Means for Implementation of the Plan | p. 199 |
Going-Concern and Liquidation Valuations | p. 199 |
A Large Reorganization Case: Kmart Corporation | p. 203 |
Landlords and Unexpired Leases | p. 204 |
Vendors and Critical Vendor Motions | p. 206 |
Management and KERPs Pre-2005 BAPCPA | p. 208 |
Fraudulent Transfers | p. 209 |
Subsidiary Guarantees and Substantive Consolidation | p. 210 |
Chapter 11 Committees and Out-of-Control Professional Costs | p. 211 |
Blocking Positions | p. 211 |
Buying Claims in Chapter 11 | p. 214 |
Debtor-in-Possession Financing | p. 215 |
Kmart's Plan of Reorganization and Plan Investors | p. 218 |
Investment Performance | p. 222 |
An Ideal Restructuring System | p. 225 |
Feasibility and Cash Bailouts | p. 226 |
Good Enough Rather Than Ideal | p. 226 |
Highly Beneficial Elements in the U.S. Restructuring System | p. 226 |
Goals of an Ideal Restructuring System | p. 228 |
Suggested Reforms | p. 229 |
Notes | p. 233 |
About the Authors | p. 238 |
Index | p. 239 |
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