Distress investing: principles and technique

Foreword

Preface

Acknowledgments

Part 1. The General Landscape of Distress Investing

Chapter 1. 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

Financial Meltdown of 2007-2008

Principal Provisions of the 2005 Bankruptcy Act as They Affect Chapter 11 Reorganizations of Businesses

Chapter 2. The Theoretical Underpinning

What Market?

Toward a General Theory of Market Efficiency

External Forces Influencing Markets Explained

What Risk?

Capital Structure and Credit Risk

Valuation

The Company as a Stand-Alone Entity

Control and Its Vital Importance

Chapter 3. 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

Chapter 4. Deal Expenses and Who Bears Them

Attorneys and Financial Advisers' Compensation Structure and the Distribution of the Fee Pie

Time in Chapter 11 and Number of Legal Firms Retained

Determinants of Legal Fees and Expenses

Determinants of Financial Advisers' Fees and Expenses

Can Professional Costs Be Excessive?

Appendix

Chapter 5. Other Important Issues

Management Compensation and Entrenchment

Tax and Political Disadvantages

Chapter 6. The Five Basic Truths of Distress Investing

Truth 1. No One Can Take Away a Corporate Creditor's Right to a Money Payment Outside of Chapter 11 or Chapter 7

Truth 2. Chapter 11 Rules Influence All Reorganizations

Truth 3. Substantive Characteristics of Securities

Truth 4. Restructurings Are Costly for Creditors

Truth 5. Creditors Have Only Contractual Rights

Part 2. Restructuring Troubled Issuers

Chapter 7. Voluntary Exchanges

Problems with Voluntary Exchanges

The Holdout Problem Illustrated

Making a Voluntary Exchange Work

Tax Disadvantages of a Voluntary Exchange versus Chapter 11 Reorganization

Chapter 8. A Brief Review of Chapter 11

Liquidations and Reorganizations

Starting a Case: Voluntary versus Involuntary Petitions

Forum Shopping

Parties in a Chapter 11 Case

Administration of a Chapter 11 Case

The Chapter 11 Plan

Chapter 9. The Workout Process

Parties and Their Differing Needs and Desires

Types of Chapter 11 Cases

Leverage Factors in Chapter 11

Part 3. The Investment Process

Chapter 10. How to Analyze: Valuation

Strict Going Concern Valuation

Resource Conversion Valuation

Liquidation Valuations

Chapter 11. Due Diligence for Distressed Issues

Chapter 12. Distress Investing Risks

Risks Associated with the Alteration of Priorities

Risks Associated with Collateral or Enterprise Valuation

Reorganization Risks

Other Risks

Chapter 13. Form of Consideration versus Amount of Consideration

Part 4. Cases and Implications for Public Policy

Chapter 14. Brief Case Studies of Distressed Securities, 2008-2009

Performing Loans Likely to Remain Performing Loans

Small Cases

Large Cases

Capital Infusions into Troubled Companies

Chapter 15. 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

Chapter 16. 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

Chapter 11 Committees and Out-of-Control Professional Costs

Blocking Positions

Buying Claims in Chapter 11

Debtor-in-Possession Financing

Kmart's Plan of Reorganization and Plan Investors

Investment Performance

Chapter 17. An Ideal Restructuring System

Feasibility and Cash Bailouts

Good Enough Rather Than Ideal

Highly Beneficial Elements in the U.S. Restructuring System

Goals of an Ideal Restructuring System

Suggested Reforms

Notes

About the Authors

Index