Distressed Debt Diligence

Distressed debt diligence requires underwriting the entire capital structure to understand where value breaks and which securities are in/out of the money. Cash flow potential is the ultimate answer, but that requires understanding credit aspects (liquidity runway, working capital cycles, contract durations, fixed and variable costs, etc) and equity upside levers. Buying a defaulted bond at 20 cents is much more similar to equity investing vs credit because at that level you are most likely underwriting some sort of turnaround and your return will come through enterprise value appreciation, assuming that bond is exchanged for equity in a restructuring. The granularity of diligence can differ depending on where your interest  in. Some guys like to hang out top of the capital structure where the securities are "above the fray" and looking at a cash or other hard money type of recovery, in which case the analysis would probably be more credit focused. My last distressed process probably included 7+ hours of expert calls, but mainly because the company's products were fairly niche and technical, so something like expert calls isn't always required. I think the emphasis on legal diligence is overrated. Everyone has the same xtract, reorg or covenant review document review packages, everyone gets their counsel to do a covenant review, and "gotcha" type of legal analysis are few and far between. If you follow enough restructurings I think you'll find that even when "gotcha' moments arise they most often end in some sort of compromise or settlement. Obviously there is a base level of legal and document knowledge required to avoid making simple structure mistakes. 

Not sure if I would comp to vanilla private credit at all...there is also a second level analysis of what is the market value of the crap you end up owning on the other side of a restructuring. Just because you receive reorg equity worth $200 million based on plan value doesn't mean it will trade or otherwise transact there, you might be taking a mark at $100 million.