Distressed Debt Analysis

Retail Price: $119.95

Direct Price: $99.95

Strategies for Speculative Investors
By Stephen G. Moyer
Hardcover, 6×9, 448 pages
ISBN: 1-932159-18-5
November 2004

ISBN: 1-932159-18-5 Categories: ,


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 Features

  • Provides investment techniques to profit from reorganizations, restructurings, and bankruptcies, including appropriate hedging and exit strategies for either short- or long-term investment horizons
  • Explains 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 goal
  • Identifies when a restructuring can be accomplished outside of a bankruptcy process and the most effective strategies and techniques to effect such change
  • Details the legal and financial due diligence issues that affect investment returns to appropriately identify and quantify the investment risks
  • Illustrates basic investment strategies and analytical techniques with case studies and references to numerous real-world examples to emphasize important concepts and critical issues
  • WAV offers downloadable due-diligence checklist, comprehensive glossary, and example of “big-boy” letter, confidentiality agreements, reorganization plans and key covenant provisions — available from the Web Added Value™ Download Resource Center upon publication

About the author(s)

Stephen G. Moyer has been a Portfolio Manager and Analyst in the Distressed Credit Group at Pacific Investment Management Company (PIMCO). Mr. Moyer has over 25 years of experience in investment analysis and corporate finance. His interest in distressed securities analysis began when he was a member of the High Yield Research Group at Drexel Burnham Lambert. He has also been affiliated with many other leading securities firms and investment managers including Tennenbaum Capital Partners, The First Boston Corporation (now Credit Suisse), Banc of America Securities, Kemper Securities (now Wells Fargo) and Imperial Capital. He began his career as a lawyer at Jones Day and later with Riordan & McKenzie. He is a recognized speaker and writer on the subject of distressed securities and a frequent lecturer at industry events and graduate business programs.

Mr. Moyer received a J.D. from Stanford University Law School, an M.B.A. from the University of Chicago Business School, and a B.A. from Grinnell College. He is a member of the California and Texas bars, holds the Chartered Financial Analyst designation, and has passed the Uniform Certified Public Accounting Examination.

Table of Contents

Chapter 1. Introduction

An Example of a Distressed Debt Situation

What Is Distressed Debt?

Investing in Distressed Debt


Chapter 2. 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



Chapter 3. 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



Chapter 4. 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



Chapter 5. 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



Chapter 6. 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



Chapter 7. 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



Chapter 8. Causes of Financial Distress and the Restructuring


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



Chapter 9. Options for Alleviating Financial Distress:

The Company’s Perspective

Properly Assessing the Distressed Firm’s Likely Actions Is Key to Assessing the Investment Outcomes

Example 1: Playing the Waiting Game

Example 2: 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



Chapter 10. 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



Chapter 11. 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


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



Chapter 12. 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





Chapter 13. 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

Appendix: Chess Notation and Game Moves

Disclosure of Possible Conflicts of Interest



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