Distressed Debt Analysis Strategies for Speculative Investors

ISBN-10: 1932159185

ISBN-13: 9781932159189

Edition: 2004

Authors: Stephen G. Moyer

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Book details

Copyright year: 2004
Publisher: J. Ross Publishing, Incorporated
Binding: Hardcover
Pages: 450
Size: 6.00" wide x 9.00" long x 1.00" tall
Weight: 1.892
Language: English

Notes on Style
About the Author
Web Added Value
An Example of a Distressed Debt Situation
What Is Distressed Debt?
Investing in Distressed Debt
The Distressed Debt Investment Opportunity
Financial Restructurings in the 2000-2003 Era
Precursors to Default
Economic Performance
Relative Quantity of Low-Rated Bonds
Capital Markets Liquidity
Market Conditions That Permit Superior Returns
Equal Access to Information
Rational Behavior
Low Transaction Costs
Conceptual Overview of Financial Distress and the Restructuring Process
A Simple Model of the Firm
Extensions of the Basic Model
A Conceptual View of Financial Distress
How Restructurings Attempt to "Fix" the Distress
Legal Overview of Distressed Debt Restructurings
Out-of-Court Restructurings: The Preferred Option When Effective and Feasible
The Financial Effects of an Out-of-Court Restructuring
The Out-of-Court Restructuring Process
Parties Involved
Strategic Considerations in Participating on the Bondholder Committee
Beginning the Process
Implementing the Restructuring
Feasibility: The Holdout Problem
In-Court Restructurings: An Overview of the Bankruptcy Process
Declaring Bankruptcy
Jurisdiction of Filing
Timing of Filing
The Goal: The Plan of Reorganization
The Role of Exclusivity and Prefiling Coordination
Content and Structure of the Plan
Operating Under Chapter 11
Stabilizing Operations
Developing a Going-Forward Business Plan
Determining the Assets and Liabilities
Determining the Valuation and the New Capital Structure
Voting on and Confirming a Plan of Reorganization
Overview of the Valuation Process
The Basics of Cash-Flow-Based Valuation
Using EBITDA as a Measure of Cash Flow
Understanding and Adjusting EBITDA
Limitations of EBITDA
Comparing Discounted Cash Flow and EBITDA Multiple Approaches
Comparable Company Analysis Based on Enterprise Value
Calculating Enterprise Value
Determining the Correct Multiple
Using Comparable Company Analysis
Alternatives to the EBITDA Multiple Approach
Revenue-Based Valuations
Asset-Based Valuations
Customer-Based Valuations
Liquidation Valuations
Leverage and the Concepts of Credit Support and Capacity
The Interrelationship of Credit Risk and Credit Support
Credit Risk
Credit Support
Credit Capacity
Credit Capacity as Measured by Debt Repayment Ability
Stable Cash Flow Scenarios
Volatile Cash Flow Scenarios
Debt Capacity Under Alternative Criteria
Asset Coverage
Ability to Refinance
Interest Expense Coverage
Capital Instruments Designed to "Avoid" Credit Capacity Criteria
Exchangeable Preferred Stock
Convertible Bonds
Discount Notes and Payment-in-Kind Notes
Capital Structures and the Allocation and Management of Credit Risk
Using Corporate and Capital Structures to Allocate Credit Risk
Grants of Collateral
Contractual Provisions
Maturity Structure
Corporate Structure
How Capital Structures Manage Credit Risk
Restricted Payments
Negative Pledge Clauses
Performance Covenants
Put Rights
Forced Call in the Event of a Downgrade
Performance-Linked Pricing Provisions
Causes of Financial Distress and the Restructuring Implications
Indicators of Financial Distress
Debt Ratings
Predictive Models
Market Prices
Causes of Financial Distress
Performance Materially Below Expectation
Economic Downturn
Uncompetitive Product or Service
Unrealistic Business Plan
Poor Management
Near-Term Liquidity Issues
Bank Debt Scenarios
No Bank Debt Scenarios
Unexpected Liabilities
Tort Claims
Contract Liabilities
Crisis of Confidence: Fraud and Other Events That Create Financial Uncertainty
Reliability of Historical Financial Data and Valuation Issues
Liquidity and the Likelihood of Bankruptcy
Options for Alleviating Financial Distress: The Company's Perspective
Properly Assessing the Distressed Firm's Likely Actions Is Key to Assessing the Investment Outcomes
Playing the Waiting Game
Between a Rock and a Hard Place
Strategic Options to Resolve Financial Distress Outside Bankruptcy
Raise Additional Capital
Asset Sales
Secured Financings
Sale/Leaseback Financings
Equity Sponsors
Reducing Leverage
Open Market Repurchases
Direct Purchases from Holders
Cash Tender Offers
Exchange Offers
Coercive Exchange Offers
Noncoercive Exchange Offers
Constraints on the Range of Options
Time-to-Liquidity Event
Magnitude of Problem
Complexity of Capital Structure
Severability of Business Units
Cause(s) of Financial Distress
Strategies When Bankruptcy Appears Necessary
Maintaining Liquidity
Preplanned Filings
Profiting from Financial Distress: The Investor's Perspective
Defining the Investment Objectives
Tailoring a Strategy to the Investment Objectives
Non-Chapter 11 Situations
Passive Involvement
Active Involvement
Chapter 11 Situations
Feasibility Considerations
Capital Structure
Market Versus True Valuation
Market Liquidity/Concentration of Holdings
Other Distressed Investors
Bank Debt
Large Block Holders of Public Debt
Hedging and Capital Structure Arbitrage
Return Potential of Capital Structure Arbitrage
Common Capital Structure Arbitrage Trades
Pari Passu Securities with Different Maturities
Senior Versus Junior Securities
Bonds Versus Equity
Practical Aspects of the Investment Process and Due Diligence
Practical Realities of the Investment Analysis Process
Screening Situations to Prioritize Opportunities
Reacting to Volatile Situations
A Time-Efficient Valuation Methodology
Performing Due Diligence
Diligence Cost-Benefit Analysis
Prioritizing the Diligence Issues
Financial Due Diligence
Basic Goals of Financial Due Diligence
Obtaining Publicly Available Financial Information
Accessing Management
Special Valuation Considerations in Financially Distressed Contexts
Business Deterioration During a Reorganization
Reorganization Costs
Critical Vendor Payments
Cash Accumulation During the Reorganization
Tax Issues
Liquidity Implications of a Distressed Firm's Current Tax Status
Potential Value from Carryforward of Net Operating Losses
Priority Status of Tax Claims
Legal Due Diligence
Obtaining the Relevant Documents
Checklist of Legal and Bankruptcy-Related Issues to Consider
Voidable Preferences
Substantive Consolidation
Structural Advantages
Equitable Subordination
Zone of Insolvency
Special Considerations When Investing in Claims That Are Not Negotiable Instruments
Recent Developments Under the Sarbanes-Oxley Act of 2002
Mechanics of Accumulating the Investment
Investment Strategy and Market Environment Drive Accumulation Approach
Consummating the Trade
Firm Market
No Market or Above-Market Offering
Settling the Trade
Bank Debt
Holder Identity
Special Considerations for Revolving Loans
Dynamics of the Workout Process: The Endgame
The Parties
The Debtor
Debtor's Bankruptcy Counsel
Debtor's Financial Advisor
The Committee
Committee Legal Counsel
Committee Financial Advisor
The Secured Creditors
The Bankruptcy Judge
Types of Chapter 11 Cases
Preplanned Restructuring
Full Prepack
Prenegotiated Filings
Asset Sales
Sales Intended to Enhance Recoveries by Maximizing Estate Value
Sales Designed to Maximize Creditor Recoveries
Free-Fall and Contested Chapter 11 Reorganizations
Sources of Leverage in the Chapter 11 Process
Management and the Right of Exclusivity
Creditors and the Threat of Litigation
Secured Creditors
Voting and Confirmation
Postreorganization Considerations
Postreorganization Equities
Size of Expected or Probable Market Capitalization
Postreorganization Trading Float
Forced Sellers
Company Profile
Postconfirmation Lockups
Tax-Based Trading Restrictions
Trading Performance of Back-End Equities
Postreorganization Debt Securities
Liquidating Trusts
Literature Survey and Selected References
Chess Notation and Game Moves
Disclosure of Possible Conflicts of Interest
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