Distress Investing: Principles and Technique (Wiley Finance)

273 Pages·2009·2.99 MB·English

by  Martin J. Whitman

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AdditionalPraisefor
DistressInvesting:PrinciplesandTechnique
“Distress Investing: Principles and Technique presents a concise, practical
description of the restructuring process, the various players in the process
and the constraints and incentives motivating their actions, as well as the
institutionaland economic forcesimpacting theprocess.The power ofthis
holisticviewisdemonstratedinmanyactualdistressedinvestingsituations.
Without the wisdom in this book anyone investing in distressed securities
runstheriskofbecomingadistressedinvestor!”
—STANGARSTKA
DeputyDeanandProfessorinthePracticeofManagement,
YaleSchoolofManagement
“MartyWhitmanandFernandoDizhaveproducedanextraordinaryguide
totoday’sworldofdistressedinvesting.DrawingonWhitman’s50+years
ofsuccessfulexperienceinthefield,theyhaveexplainedinstraightforward
terms how an investor can construct a portfolio of distressed investments
within today’s complex variety of different securities. While there are no
guarantees of ultimate investment performance, following these principles
willenhancetheprobabilityofaboveaverageportfolioreturns.”
—JOSEPHW.BROWN
CEO,MBIAInc.
“Inaworldpuzzledaboutthereasonsforthecollapseofoureconomy,we
are fortunate to have two gifted observers, the authors of this book, who
understandtheelusiveintricaciesoftheproblemandexplaintheirdetailsso
effectively.”
—WILLIAMBAUMOL
AcademicDirector,BerkleyCenterforEntrepreneurship
Studies,NewYorkUniversity
“A very comprehensive and thorough analysis of a timely and interesting
topic.Filledwithexcitingandsometimesprovocativeinsights,thisisamust-
readfortheuninitiatedaswellasthosedeeplyimmersedinthetopic.”
—ANDREWDENATALE
Partner,White&CaseLLP
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Distress
Investing
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Founded in 1807, John Wiley & Sons is the oldest independent publish-
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Distress
Investing
Principles and Technique
MARTIN J. WHITMAN
FERNANDO DIZ
John Wiley & Sons, Inc.
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Copyright(cid:1)C 2009byMartinJ.WhitmanandFernandoDiz.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin
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LibraryofCongressCataloging-in-PublicationData:
Whitman,MartinJ.
Distressinvesting:principlesandtechnique/MartinJ.Whitman,FernandoDiz.
p. cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-11767-5(cloth)
1.Investments. 2.Businesscycles. I.Diz,Fernando,1956- II.Title.
HG4521.W47422009
332.6–dc22
2008054928
ISBN978-0-470-11767-5
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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To my wife Lois
To my children and spouses and companions—
Jim and Sara; Barbara and Dave; Tom and Mira
To my grandchildren—
Daniel, Will, Nathaniel, Lucien, Raphael, and Rosalie
Martin J. Whitman
To my parents, Alfonso and Lelia,
for their unwavering support
To Pepa for her patience
To Claudia, Emmett, Mateo, and Patricia
Fernando Diz
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Contents
Foreword xiii
Preface xv
Acknowledgments xxii
PARTONE
TheGeneralLandscapeofDistressInvesting
CHAPTER1
TheChangedEnvironment 3
TrendsinCorporateDebtGrowthandLeveragebefore
theFinancialMeltdownof2007–2008 4
JunkBondsandtheLevering-UpPeriod 6
TheSyndicatedLoanMarketandLeveragedLoans 12
FinancialMeltdownof2007–2008 16
PrincipalProvisionsofthe2005BankruptcyActas
TheyAffectChapter11Reorganizations
ofBusinesses 22
CHAPTER2
TheTheoreticalUnderpinning 27
WhatMarket? 27
TowardaGeneralTheoryofMarketEfficiency 29
ExternalForcesInfluencingMarketsExplained 32
WhatRisk? 34
CapitalStructureandCreditRisk 38
Valuation 39
TheCompanyasaStand-AloneEntity 41
ControlandItsVitalImportance 42
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viii CONTENTS
CHAPTER3
TheCausesofFinancialDistress 43
LackofAccesstoCapitalMarkets 44
DeteriorationofOperatingPerformance 46
DeteriorationofGAAPPerformance 48
LargeOff-Balance-SheetContingentLiabilities 51
CHAPTER4
DealExpensesandWhoBearsThem 53
AttorneysandFinancialAdvisers’Compensation
StructureandtheDistributionoftheFeePie 54
TimeinChapter11andNumberofLegal
FirmsRetained 66
DeterminantsofLegalFeesandExpenses 67
DeterminantsofFinancialAdvisers’FeesandExpenses 68
CanProfessionalCostsBeExcessive? 68
Appendix 69
CHAPTER5
OtherImportantIssues 71
ManagementCompensationandEntrenchment 71
TaxandPoliticalDisadvantages 73
CHAPTER6
TheFiveBasicTruthsofDistressInvesting 77
Truth1:NoOneCanTakeAwayaCorporate
Creditor’sRighttoaMoneyPaymentOutsideof
Chapter11orChapter7 78
Truth2:Chapter11RulesInfluenceAllReorganizations 82
Truth3:SubstantiveCharacteristicsofSecurities 84
Truth4:RestructuringsAreCostlyforCreditors 86
Truth5:CreditorsHaveOnlyContractualRights 87
PARTTWO
RestructuringTroubledIssuers
CHAPTER7
VoluntaryExchanges 91
ProblemswithVoluntaryExchanges 92
TheHoldoutProblemIllustrated 93