Distress Investing: Principles and Technique

by Martin J. Whitman; Fernando Diz

• ISBN13: 9780470488430
• ISBN10: 0470488433
• Format: eBook
• Copyright: 2009-04-01
• Publisher: Wiley

Summary

Praise for Distress Investing"Marty Whitman has distilled decades of distressed investing experience into a text that is a must-read for everyone interested in the field, whether a student or a professional investor."-Wilbur L. Ross, Chairman and CEO, WL Ross & Co. LLC"Distress Investing: Principles and Technique represents a detailed and unique perspective on an arcane arena of investment that is going to get a lot more attention. Marty Whitman is the master, and has set the standard for many years."-Sam Zell, Chairman, Equity Group Investments, LLC"Martin Whitman and Professor Diz have produced a seminal work on the ins and outs of distressed investing for all distressed debt investors. It is jam-packed with information and guidance for the novice and the experienced. A must-read for anyone interested in distressed investing."-Lewis Kruger, Stroock & Stroock & Lavan LLP"Marty Whitman, a legend in distress investing, packs decades of experience into these pages. The restructuring of the capital markets currently under way is sure to provide great distress investment opportunities, which this guide book can make count for you."-Bruce Flatt, Brookfield Asset Management Inc."The principles found in this book are those I used in the reorganization of my business from bankruptcy to an S&P 500 company with an investment grade rating and a multibillion-dollar market capitalization. An excellent premier by Marty Whitman and Professor Diz, integrating economic theory with real-world investment to help investors of all shapes and sizes understand and invest in distressed securities."-Gene Isenberg, Chairman and CEO, Nabors Industries, Inc."Marty Whitman, the unquestioned 'Dean' of active distressed investors, and Fernando Diz, one of the few academics specializing in distressed investing, have teamed up to provide perhaps the best and most comprehensive primer on distressed securities and markets. I learned so much from this remarkable volume."-Edward I. Altman, Max L. Heine Professor of Finance, NYU Stern School of Business, Director of credit and debt markets research at the NYU Salomon Center and adviser to several financial institutions including, Paulson & Co. and Concordia Advisers

Table of Contents

Foreword

Preface

Acknowledgments

The General Landscape of Distress Investing.

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

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

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

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

Other Important Issues.

Management compensation and entrenchment

Tax and political disadvantages

The Five Basic Truths of Distress Investing.

No one can take away a corporate creditor's right to a money payment outside of Chapter 11 or Chapter 7

Chapter 11 rules influence all reorganizations

Substantive characteristics of securities

Restructurings are costly for creditors

Creditors have only contractual rights

Restructuring Troubled Issuers.

Voluntary Exchanges.

Voluntary Exchanges

The holdout problem illustrated

Making a voluntary exchange work

Tax Disadvantages of a Voluntary Exchange vs. Chapter 11 Reorganization

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

The Workout Process.

Parties and their differing needs and desires

Types of Chapter 11 Cases

Leverage factors in Chapter 11

The Investment Process.

How to Analyze: Valuation.

Strict Going Concern Valuation

Resource conversion valuation

Liquidation valuations

Due Diligence for Distressed Issues.

Distress Investing Risks.

Risks associated with the alteration of priorities

Other risks

Form of Considerations vs. Amount of Consideration.

Cases and Implications for Public Policy.

Brief Case Studies of Distressed Securities 2008-2009.

Performing Loans Likely to Remain Performing Loans

Small Cases

Large Cases

Capital Infusions into Troubled Companies

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

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

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

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

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