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Distress Investing: Principles and Technique
Financial innovation, new laws and regulations, and the financial meltdown of 2007–2008 are just a few of the forces that have shaped, and continue to shape, today's distress investment environment. Combine this with the fact that the discipline of distress investing doesn't always follow what conventional wisdom says, and you can see why it is one of the most challenging areas in finance. Nobody understands this better than Martin Whitman—the legendary founder of Third Avenue Management LLC and a pioneer in the field of distressed markets—and leading academic Dr. Fernando Diz of Syracuse University. That's why they decided to write Distress Investing . As an outgrowth of annual distress and value investing seminars the two have taught together at Syracuse University's Martin J. Whitman School of Management, this reliable resource will help you gain a better understanding of the essential principles and techniques associated with distress investing and show you how to effectively apply them in the real world. Divided into four comprehensive parts—the General Landscape of Distress Investing, Restructuring Troubled Issuers, the Investment Process, and Cases and Implications for Public Policy—this book comprehensively covers the practice of buy-and-hold investing in distressed credits, whether it be performing loans or the reinstated issues of a reorganized issuer. From the recent changes to U.S. bankruptcy code and creditor rights to cash bailouts, you'll quickly learn how to analyze distressed situations such as pricing issues, arbitrage opportunities, tax disadvantages, and the reorganization of funding plans. Along the way, case studies of both large and small distress investing deals—from Kmart to Home Products International—will give you a better perspective of the business. Critical topics addressed throughout these pages include: In today's turbulent economic environment, distress investing presents some enticing opportunities. Put yourself in a better position to excel at this endeavor with Distress Investing as your guide.
272 pages, Hardcover
First published April 13, 2009
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497 people want to read
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Displaying 1 - 6 of 6 reviews
November 10, 2024
The book is a detailed guide on evaluating distressed securities, offering insights into asset valuation, bankruptcy law, and capital structure. It is based in the USA. With real-world case studies, the author illustrates a value-based approach to finding opportunities in troubled companies. Very technical.
December 4, 2024
- My biggest takeaway from the book is actually: stay away from distress investing, unless your sole business is on turnaround investment. The problem lies that even if the intrinsic value analysis is correct, the unknown of it (bankruptcy preceding timeline, potential take over competitors, unknown market force) - mostly the potential of prolonged timeline means that opportunity cost could be incredibly high. Distress investing works the best during a sudden down term, but sudden down term also means that the likelihood of unknown market condition could be prolonged, and market misprice could happen easily when an distress investor’s money is tied up in an another project. On an up-term, equity investing would easily beat credit investing over the long haul
- The increase availability of private credit also means that credit cycle also gets increasingly volatile (either upwards or downwards)
- GAAP under FASB 113 and FASB 157 requires marked-to-market accounting metric, which means that during times of illiquidity or lack of price discovery, the market price will be distorted to the downside, and significantly undervalue the company’s long term prospects
- In 2008, Good companies also faced liquidity issue (such as JP Morgan Chase). One almost could always count on government rescue nowadays (with TARP)
- On callable loans: during the 2008 crisis, a lot of loans were made in high interest rates, believing the rates will quickly go down. However, even as rates did went down, due to the muted capital market, they can’t refinance. However, as the capital market defrost, those company then would have incentive to call their loans and use the new (lower) interest rate. Thus, if the loan is bought at a significant discount, the call-at-par price could afford investor a very healthy margin
- Going concern simply means the company (the concern) is still operating (going), as oppose to “gone concern”
- Goodwill charges (as well as many other marked-to-market accounting) must be viewed carefully. The author (through other medium) often criticize management’s ability to manipulate financial figures. Thus, a security analyst must truly understand the nature of why each action was conducted and re-organize the company’s balance sheet accordingly (for instance, Warren Buffett often have stated there are many economic Goodwill, such as brand value, that are not valued under GAAP - probably for a good reason, since how does one value brand value into a coherent single number?)
- (I looked into the author’s fund to see how it performed (the author passed away in 2018 and managed the fund till 2012). It seemed that the fund had a massive blow up in 2015 due to liquidity issues, as investors want out and the fund had a de facto bank run. The three securities the author wrote about did mostly recover towards the end, but due to the prolonged bankruptcy process, had massive liquidity issue until the restructuring process. Thus, a distress fund must be closed-ended during inception, or structure it like Berkshire where while open-ended, the major shareholder has the majority saying and could buy back share during distress.)
- Historically speaking, even during the worst of the times, majorities (>60%) of junk bonds remain performing
- (Given the illiquidity nature of a company bond security during time of distress, it’s probably wiser to not invest in those given the likelihood of prolonged interest parties’ disagreements. Instead, invest in lower yielding and closer to certainty performing bond would be much more ideal. Since such security would distribute interest on the mean time, and as capital market recovers, the security would return to liquid status - the same thing can’t be said for illiquid restructuring securities that is in the process of bankruptcy)
- (… having said above, the author’s strategy of purchasing those highly distressed bond is so that even in the event of default, the bond holder would get converted into equity holder. Given the tax loss benefit of the newly structured company, it could be highly lucrative. However, NOL carry over is very nuanced and the IRS poses an ownership test, more of that can be found in Section 368. Having said that, it appears that as long as the restructuring occurred under Chapter 11 - not informal process - ownership changes rule would not be triggered (Section 382(I)(5). However, if said company sells more than half of its equity to a new owner within 5 years, NOL would be capped as well.)
- (More on above: covenant is very important. If the covenant does not prohibit issuer from raising more debt as senior as the creditor’s existing debt, during crisis, the issuer could raise more debt and effectively dilute existing bond holder, in the event of eventual restructuring of converting into equity. Reading indenture carefully is very important.)
- The increase availability of private credit also means that credit cycle also gets increasingly volatile (either upwards or downwards)
- GAAP under FASB 113 and FASB 157 requires marked-to-market accounting metric, which means that during times of illiquidity or lack of price discovery, the market price will be distorted to the downside, and significantly undervalue the company’s long term prospects
- In 2008, Good companies also faced liquidity issue (such as JP Morgan Chase). One almost could always count on government rescue nowadays (with TARP)
- On callable loans: during the 2008 crisis, a lot of loans were made in high interest rates, believing the rates will quickly go down. However, even as rates did went down, due to the muted capital market, they can’t refinance. However, as the capital market defrost, those company then would have incentive to call their loans and use the new (lower) interest rate. Thus, if the loan is bought at a significant discount, the call-at-par price could afford investor a very healthy margin
- Going concern simply means the company (the concern) is still operating (going), as oppose to “gone concern”
- Goodwill charges (as well as many other marked-to-market accounting) must be viewed carefully. The author (through other medium) often criticize management’s ability to manipulate financial figures. Thus, a security analyst must truly understand the nature of why each action was conducted and re-organize the company’s balance sheet accordingly (for instance, Warren Buffett often have stated there are many economic Goodwill, such as brand value, that are not valued under GAAP - probably for a good reason, since how does one value brand value into a coherent single number?)
- (I looked into the author’s fund to see how it performed (the author passed away in 2018 and managed the fund till 2012). It seemed that the fund had a massive blow up in 2015 due to liquidity issues, as investors want out and the fund had a de facto bank run. The three securities the author wrote about did mostly recover towards the end, but due to the prolonged bankruptcy process, had massive liquidity issue until the restructuring process. Thus, a distress fund must be closed-ended during inception, or structure it like Berkshire where while open-ended, the major shareholder has the majority saying and could buy back share during distress.)
- Historically speaking, even during the worst of the times, majorities (>60%) of junk bonds remain performing
- (Given the illiquidity nature of a company bond security during time of distress, it’s probably wiser to not invest in those given the likelihood of prolonged interest parties’ disagreements. Instead, invest in lower yielding and closer to certainty performing bond would be much more ideal. Since such security would distribute interest on the mean time, and as capital market recovers, the security would return to liquid status - the same thing can’t be said for illiquid restructuring securities that is in the process of bankruptcy)
- (… having said above, the author’s strategy of purchasing those highly distressed bond is so that even in the event of default, the bond holder would get converted into equity holder. Given the tax loss benefit of the newly structured company, it could be highly lucrative. However, NOL carry over is very nuanced and the IRS poses an ownership test, more of that can be found in Section 368. Having said that, it appears that as long as the restructuring occurred under Chapter 11 - not informal process - ownership changes rule would not be triggered (Section 382(I)(5). However, if said company sells more than half of its equity to a new owner within 5 years, NOL would be capped as well.)
- (More on above: covenant is very important. If the covenant does not prohibit issuer from raising more debt as senior as the creditor’s existing debt, during crisis, the issuer could raise more debt and effectively dilute existing bond holder, in the event of eventual restructuring of converting into equity. Reading indenture carefully is very important.)
May 17, 2020
the book is really good and I do understand why the average rating is higher than what I have given. The reason I'm rating it lower is the exclusive focus on the bankruptcy practices in the US. It does not describe the fundamental principles which makes it hard to assess the value for other systems.
April 4, 2020
El libro está más bien enfocado al inversor institucional con conocimientos ya previos en distressed investments. Para el inversor retail, aunque puede sacar aprendizaje, no le resultará tan útil a no ser que quiera seguir en el proceso de aprender sobre el tipo de inversiones expuestas.
Es un libro, que aún no siendo para legalista, tiene vocabulario y estrutuctura de libro tipo legal.
Al final del libro expone unos casos que ayudan a digerir parte del contenido.
Es un libro, que aún no siendo para legalista, tiene vocabulario y estrutuctura de libro tipo legal.
Al final del libro expone unos casos que ayudan a digerir parte del contenido.
April 17, 2016
I mean it's fine, there aren't any distressed real estate debt audiobooks so I thought I would grab this. Fun terms, cram down, DIP, Big Boy, but it seemed a little repetitive and if I remember correctly the author is bullish on MBNA debt in the beginning so yeah hmm...
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April 22, 2018Very useful
Displaying 1 - 6 of 6 reviews