Investing in unsecured debt as a retail investor?
I once had a discussion with a friend of mine who works at a HF regarding the ability of a retail investor to get involved in the stressed/ distressed space by buying secured or unsecured debt. He claimed that it isn’t possible given liquidity constraints and the need for large amounts of capital.
Now that I’ve given it a second thought, I don’t see how that’s the case. For example, I’m currently interested in buying AMC’s unsecured debt trading at 18 cents on the dollar. Given that bonds have a face value of $1000 (please correct me if I’m wrong here), why would I require a large amount of capital to buy a few of these? Also, could the market really be illiquid, to the point where it’s impossible for a retail investor to exit, for a company like AMC?
Your advice is appreciated.
He doesn't mean you literally can't buy the bonds, he means that its not really worth it unless its a "fire and forget" type of investment for your PA. Retail investors are screwed all the time in bankruptcies, exchange offers, etc and effectively have zero rights.
Well.. there’s the absolute priority rule and a fiduciary duty to creditors during a bankruptcy. Furthermore, as an unsecured creditor, I would be entitled to serve in an unsecured creditors’ committee - which would give me more say in determining the outcome of the bankruptcy.
Am I missing something here?
Yes, that sounds nice but its pretty naive. You are not going to serve on an unsecured creditors committee if you own like $1k worth of bonds. I don't think anyone would talk to you even if you owned $500k bonds...especially with AMC which has hundreds of millions of unsecured bonds. Even if someone did talk to you if you're persistent enough, you will have zero say in anything re: bankruptcy outcome. Retail holders are a huge nuisance in bankruptcies, and in situations with heavy retail ownership the advisors will construct a plan to "deal with them". Such ways can include an exchange offer where bad terms go to retail owners and good terms are only available to institutional investors, effectively squeezing retail guys out of the situation. Briggs and Stratton had a representative from a random brokerage with lots of retail clients who owned bonds on the unsecured committee, and I sort of remember them being negative value add. All of my peers who throw stressed / distressed bonds into their PA are either 1) taking a flyer on a binary outcome or 2) being a hold out in an exchange or something, again taking a flyer.
AMC specifically might be liquid enough, but for a lot of distressed situations you’ll have trouble finding anyone interested in selling blocks less than $1M. Institutional investors looking to unwind a $10M+ position typically don’t want to sell a few thousand here and there
The people selling you the notes aren't selling in chunks small enough for most retail investors. It is theoretically possible to do it but logistically challenging.
I went through this phase a few years ago where I decided I was going to learn by doing in the bond market, specifically high yield (I had never invested in bonds personally before and had almost no exposure to our fixed income group). Made solid money on Sears and Toys R Us bonds. I said hey I made good money off Toys R Us before, why wouldn't it work this time? Then I learned about how suppliers will just shut you right off if they are worried about getting paid, just talk about bankruptcy or struggles with a refinancing can snowball and become self-fulfilling quick. Then I thought alright, I'll get something back in the Re-Org. Then I learned about the importance of considering the resale value of the assets the company owns. I didn't really stop and think ok who is going to buy these Toys R Us assets? Is there any market for a gigantic retail space today (who is going to step in and buy AMC theatre spaces in 2021)? That is when I also learned about DIP financing. This is when JPM comes in and just screws everyone else over and ensures that you won't get anything in the Re-Org. Those worthless bonds are still sitting in my account as a reminder that I am not a distressed debt investor.
I learned this lesson already so that you don't have to.
I have heard GS is the one who screws everyone over in the re-org, I guess why would JPM be any different haha
Sure. You got $1m to lend me on an unsecured basis? I've got over a 100 bananas on WSO
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