Distressed Investment Pitch
Does anyone have an example of a distressed debt pitch / any clear tips on how to draft one? Any help would be appreciated
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@DistressedDebt015"
1) Capital Structure (example - classic table below)
2) Situation Overview/Classholders/Equity Owners
3) Investment Thesis Points
4) Fundamentals - DCF/qualitative
5) Docs/legal analysis - important covenants and relevance to situation
6) catalyst/timeline/irr
not necessarily in the above order
A couple of points:
1) Explain "why we are here." Company ABC was acquired by PE fund via an LBO in 2016 and, due to poor performance, has been unable to deleverage. Or, Company ABC was ticking along just fine until covid forced them to shutdown operations. Basically we want to know why the company is in distress and if this is a temporary thing or something that can't be fixed.
2) Lay out the capital structure and discuss the creation multiple based on today's debt price. So, if a company has 1,000 of debt, 100 of EBITDA, and that debt trades at 50% of par, you are creating the company (by buying the debt at 50) at 5x EBITDA. We can compare this multiple to where comps that are not distressed trade today.
3) Lay out org chart and debt maturity profile.
4) You need a recovery analysis. For this you need to decide if this is a going concern business and value it, or if this is a liquidation play. If a going concern, don't bother with a DCF, just estimate normalized EBITDA and throw a multiple on that (based on where non-distressed comps trade). In the example above, normalized EBITDA is 100, comps trade at 6x EBITDA so we estimate an EV of 600. Let's assume 1000 debt (500 senior loans, 500 subordinated bonds), you would get 100% recovery for senior debt and 20% recovery for subordinated bonds.
5) What does current pricing tell you about probability of outcomes? Say the subs trade at 50. Your upside case is par recovery (100) if the business gets back to normal and your downside case is 20 (our estimate of recovery). Current price of 50 implies roughly 40% chance of upside and 60% chance of downside.
6) Summary of covenants and docs - can the company raise secured debt ahead of you (getting primed/layered) which reduces EV to give to the rest of the creditors.
Reading this made me appreciate L/S Equities so much more..
because it's easier?
Yea solid post. Def think looking at yesterday’s biggest LBOs is a good way to source today’s best DD ideas
This is really great, thank you
A good buddy of mine in the distressed debt world told me to read everything on the distressed debt investing blog. I think there may be good pitches there. Otherwise there are videos of distressed HF managers like Josh Friedman in Canyon talking about some of their best investments like Caesars. Not much of a pitch but msy be helpful in crafting a story they like. Like back in 2020 AMC was a hot pitch that DD guys may have liked. Today it might be like office real estate buildings, maybe companies that over-levered on the WFH idea and are kinda not positioned well for the reopening going on with the economy.
Idk if AMC was a hot DD pitch in 2020 lol. Maybe when the 1Ls were at 50 in November, but it was by no means a solid investment that a lot of folks pulled the trigger on. Ended up fantastic but not through the companies fundamentals, rather all the equity issuances and dumbass buyers of all their follow on issuances. A select crazy few bought the 2Ls in the low teens/20s and shorted the equity, which was a pretty solid cap structure arb play until the Redditors came along. I still think the equity is worthless but it’s sort of a self fulfilling prophecy at this point if they keep raising more equity at $50/share then equity ends up ITM.
Caesars a different beast entirely. Everyone and their mom made a fuckton on Caesars. Fed probably 80% of the distressed debt industry over the span of 7 years.
This is true. AMC credit, even the 1Ls, was always a sketchy pitch and I believe the 1L trade, until equity issuances etc, was to be the fulcrum.
If you dig around on google, there are a few old Tennenbaum Capital investment memos floating around in public filings.
There’s also some folks in the industry who anonymously publish investment ideas via substack. Some high quality stuff there as well
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