Distressed Debt Analysis

• 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

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.

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 Summary   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 Summary   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 Summary 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 Summary   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 Summary   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 Summary   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 Leverage Priority Restricted Payments Negative Pledge Clauses Time Performance Covenants Put Rights Forced Call in the Event of a Downgrade Performance-Linked Pricing Provisions Summary   Chapter 8. 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 Summary   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 Summary 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 Liquidity 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 Summary   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 Summary   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 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 Settlement Special Considerations for Revolving Loans Summary   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 Delay Management and the Right of Exclusivity Creditors and the Threat of Litigation Priority Secured Creditors Valuation Voting and Confirmation Voting Confirmation Summary   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 Warrants Trading Performance of Back-End Equities Postreorganization Debt Securities Liquidating Trusts Summary Endnotes Literature Survey and Selected References Appendix: Chess Notation and Game Moves Disclosure of Possible Conflicts of Interest   Index