Favorite Distressed/Special Situations Plays?
A lot of overlap between PE/HF that go after distressed but figured I'd throw it here. What are everyone's favorite 200 IQ distressed/special situations plays? IE Aurelius VS Windstream, Singer seizing a warship, etc...
The Monitronics / Ascent Capital HoldCo lawsuit was my favorite from last year.
Basically, Ascent Capital was a HoldCo with 100% ownership of Monitronics, like ADT-lite, plus a buncha cash and was the issuer of a convertible bond in the 60s/70s. The cash Ascent held covered the convert at par.
Monitronics was an OpCo issuer of a buncha debt (Loan @ 90s / Bond @ 60s) as well that was all coming due b/c of a springing maturity and business was in the dumps. Monitronics' creditors proposed a plan to downstream the Ascent cash to partially pay off the loan and refi the bond with a 2nd lien note at the same time.
Whitebox / Sound Point / KLS / Silverback bought the convert and sued Ascent arguing the downstream would be fraudulent conveyance and leave the HoldCo insolvent. More importantly, they sued the Company to get an injunction on the transfer and stall the process because the springing maturity was approaching for the OpCo. Ascent was a publicly traded stock, and a de-listing would've triggered a fundamental change with the converts which accelerates a cash payment at par.
I think eventually the converts settled with the Company for ~90ish and some holdouts did get par. When OpCo did file, the bonds almost went to 0 and the term lenders could've done better as well.
This is a good thread but a lot of misinformation because bankruptcy is extremely nuanced.
For example, those ASCMA 4% converts were on the brink of getting crammed last Christmas if the proposed XO had found the needed bond participation threshold. It was <$100mm tranche, 78% held by a dozen or so funds (so think...$5-15mm positions each, lots of funds were not listed in the complaint) who got paid 85c after deducting legal fees to settle. Most holders were existing holders who bought between 80-par with very little of the issue actually trading hands at low 70s or below. The most optimistic scenario, you made at most 10pts or $2mm on a $15mm market value position if you even could've sourced all those bonds at ~75c weighted average. The litigation was to defend against a fraudulent conveyance that would left you with a worthless $100mm 3L behind a deal signed up by over $2bn of opco debt, not some sort of hyper aggressive smart play by a few funds that found liquidity in a $100mm issue to get a pay down of the holdco cash.
Many distressed funds, like Monarch, put much more money to work in the $1.1bn term loan when it hit low 80s and made back par pay down + favorable equity splits + new exit TL by cramming the bonds. This was a better and more liquid trade in that complex.
I will be an intern in RX and could not be more excited and afraid of my internship ahahahah
On a serious note, thanks for sharing, can I ask you if you have more resources/cases I could learn from?
Also paging Distressed Industrial Buyer
Thanks. I'm some where between not having much to add,otoo lazy to describe a move properly and not wanting to give away tricks. OR,
For a more recent one, Blackstone GSO and Codere SA. Trigger-and-refinance deals are so ballsy it's hard to hate.
The partner that did this trade had to leave GSO - noow running his own shop
He's one of the primary people who helped build GSO to be one of the largest segments of Blackstone, I don't think he'll lose too much sleep. A brain like that will always be able to get more capital and run his own shop just fine. Didn't he cite part of the leave being because GSO was just too large now to not attract significant attention to his grey area trades? Sounds like a good reason to downsize and get to take more of a lion's share in the process without having to deal with all the bureaucracy that I'd imagine Blackstone has developed over time.
Read up on Baupost which bought billions of dollars of insurance subrogation claims against PG&E during the company’s bankruptcy at 22 cents and are exiting via settlement as of last Friday at ~55. One of the smartest plays in that reorganization in my opinion; quick 100%+ return on capital, exit in a matter of months without slogging through the rest of the process with the credit/equity guys. Brilliant.
Realistically, we could have a year long discussion just on Baupost. I had one meeting with them in 2017 as an analyst and was blown away by their intimate knowledge of a space that they were just "contemplating" an investment in.
They've lost considerably on PG&E equity though, and may end up with a net loss on the name. They also have Tubbs fire exposure, which may not receive the same settlement. The settlement will also occur at emergence, which will not be until June of next year at the earliest. And, there might be another fire, which would be an admin claim that would require the subro group to recut the deal.
All fair points. Although those are also all reasons why going the subrog route was smart to get away from the uncertainty associated with equity.
The Subro was a hedge to the equity. PG&E is still a massive loss for Baupost (and many other funds). The Analyst who initiated the subro position was fired when the equity dropped 87.5% on him.
Subros were a great trade, however, Baupost paid more like 35 cents on dollar and also has a lot of Tubbs exposure which they will now have to fight with the rest of the Subros on apportioning. However the real recovery on the Subrogation claims (before any fire specific apportionment is close to the low 70s since the Subros asserted $20bn in claims, which were more realistically $15bn claims pool.
Also you misunderstand the BK process. Baupost does not get paid out while everyone else slugs it out. Two, Baupost is a very large equity holder and is in fact slugging it out and will likely loose a bunch on its equity position as the ad hoc creditor group has a good chance of getting exclusivity terminated and filing a competing plan to the unconfirmable and massively underfunded Debtor/equity plan.
I'm more and more interested in the GameStop situation every day as a possible future distressed play - major reductions in debt but still plenty of it relative to cash, dividends slashed, the retail video game sector up against some major headwinds from plenty of factors, not the least of which are burgeoning free-to-play games that rely on microtransactions for revenue.
I wonder though, maybe that's the longer-term bet - that microtransactions will eventually be regulated and AAA companies will go back to the $60-70/title, $110-to-preorder format while at the same time fixing their balance sheet troubles.
Michael Burry's been writing to the board also and owns 3%, which is what first caught my attention.
Very underrated bankruptcy risk with GME. They will almost surely need to file when the bond matures if they end up giving in to the shareholder activists, who are idiots in this case.
My understanding is that microtransactions are unlikely to be regulated beyond an ESRB tag and perhaps two step authentication for in-game purchases since loot boxes are a separate issue. I think F2P base game / make money on MTX is here to stay.
You can already see the effect this has been having on used gaming margins for GME over the last couple quarters which exasperates cash burn.
Thanks for the detail here. I find the digital entertainment space really interesting, need to do some more reading.
I don't even see the hard value a retailer like GameStop can offer given games are now purchased digitally... Their data is also fairly useless unless they pivot substantially and launch their own games lol
legend
This aged well King
One that comes to mind is Perry Capital suing the federal government over the GSE conservatorship. They looked pretty wrong at the time and this play was one of the final nails in their coffin that led to them shutting down and returning capital to LPs. While this strategy didn’t play out as quickly as they hoped, there have since been other investors that have taken the same view as them and it now looks like their position was very sound. The IRR on their initial investment would certainly have been compressed due to the time it took to play out but the GSEs should be recapitalized in short order and begin returning capital in accordance with their initial thesis.
One great missed opportunity I have heard of was told by an analyst at a firm mentioned here. Took a look at some WaMu claims that were trading at 2 cents on the dollar during the crisis that they didn’t buy. Shortly thereafter the claims received a full recovery. Said it was the worst missed opportunity of their career.
Brutal. Kind of like Howard Marks always says...
“Being too far ahead of your time is indistinguishable from being wrong.”
Baupost, DK, Anchorage, etc vs. Iceland
What does DK stand for?
davidson kempner
there’s a case write up on this trade somewhere right?
Are any of these available online as case studies?
https://nypost.com/2010/10/26/hedgie-paul-singer-to-reap-1-5b-on-delphi…
Nuts. These guys take a tough approach to winning. How do these funds stack up in terms of training analysts for L/S equity roles?
JamesTrickington
@PrivateTechquity"
this looks like really interesting blog (petition.stackhouse) but sadly paywalled for most part. was wondering are there any other similar free resources? perhaps focused on eurozone too? have access to debtwire but its not really the same. Was sitting down to go through my newsletters and saw this at the top. Great read!
ACA Risk corridor litigation claims were trading at 5-10 cents at the beginning of year, SCOTUS granted cert in June now in the mid 20s.
Currently interesting claims are Nine West litigation, Samson oil litigation and Paragon offshore litigation, Genzyme CVR litigation and Alan Stanford claims where banks TD, SocGen, HSBC, TrustMark being sued for $5bn.
Some of the great claims or Lit trades of past years include: Mirant Escrow Receipts (stubs), Calpine Canada double dip, Delta AirLines stubs, LBT (Lehman Brothers Treasury) double dip claims, LBI (Lehman Brothers Inc) GUCs, NNI Gty double dip bonds (Nortel), Madoff Kingate redeemer claims (investors who put in redemption notices priori to the insolvency were held to be senior in right of repayment ). Chesapeake Energy Make Whole, EFIH MW
Caesars. Originally an Apollo/TPG LBO from 2008, filed for bankruptcy in 2015 as the high leverage and slow post-recession recovery meant they weren't able to pay off much debt in 7 years of ownership. Apollo & TPG began moving assets out of obligor entities in (allegedly) insider transactions...i.e., they transferred assets to legal entities where creditors had no claims and paid below-market values back to the original entities, so creditors lost access to the assets and got less than fair value in return.
Oaktree, Elliott, Appaloosa, among others got into the debt and began litigation regarding the transactions. The litigation got VERY nasty...like getting David Bonderman's personal finances dragged into court to make sure he could pay potential personal judgements against him type of nasty. Creditors also tried to get Kirkland & Ellis removed as company counsel because of potential conflicts of interest regarding work they had done pre-filing (it's pretty unusual to see an attack on professionals like this as professionals don't like going up against one another on fees / retention lest they get challenged reciprocally down the road).
Creditors won the litigation and eventually got Apollo & TPG to put another $6B into the company, plus they ended up with a good chunk of post-reorg equity. I don't know exact numbers on returns because I don't know where the various funds got in, but the company's original offer to the Oaktree / Appaloosa second-lien group was 9 cents and it was trading above par at emergence.
Never fuck with Paul Singer. Elliot has done some really wild things...
Peabody - the rights offering discount (for whoever that actually did the work) was egregious for the backstop parties (Elliott, Discovery, Aurelius (?)), jammed it in December too. Probably one of the most aggressive rights offering I've ever seen
FES - some parties had a better grasp of the dynamics, knew the parent would pay more. The recent tailwinds also helped
WaMu - someone mentioned this earlier, but some smart investors made the right bet and did the work and knew where cash was held, tax refunds, etc.
Lehman - literally made the careers of couple funds / fund managers that were really long. Situation where there was a lot of uncertainty, but wasn't much downside with the pricing (a lot had to go wrong to be impaired)
Recent:
PG&E - a recent distressed HF hotel; can make an argument that its attractive even at the ~115 level based on what's implied
Topaz Solar - a derivative play on PG&E, thought that was better than the 2034s given the overall dynamics
EIX - the prefs were pretty juicy and market didn't fully appreciate the difference vs PG&E
Good additions. I work at a large HF and was involved in some of these / familiar with all of them. Lehman is probably the single most profitable trade in distressed history taking into account $ able to be put to work, not just IRRs. Traded in the low teens I think initially post filing and today has distributed in the 40s of cash recovery (liquidation still ongoing actually - bonds trade around 1-2c). Fannie/Freddie was another career maker from the crisis. 60bn of prefs at one point traded for pennies, now at 13/share (out of 25 face, so 50c on the dollar - remains a popular trade for many funds betting on the regulatory catalyst). Peabody was a very sophisticated (and in some ways precedent setting with how aggressive the rights offering was) trade by Elliott to take value away from other creditors in the same class, but ultimately the main value driver there was simply the recovery in the met coal market. PCG bonds have been the best (risk adjusted) trade of the year in liquid distress with some very interesting activist elements, the group again led by Elliott who has 1.5bn of exposure there. Up 35pts from the low in Jan (high 70s) - wasn’t there long but billions of paper still traded in that context. Several other funds with near 1b of exposure there - citadel, varde, DK, appaloosa. On the other hand, PCG equity has been a disaster with many funds losing hundreds of millions - baupost, anchorage, Blue mountain, etc.
As you can see, large distressed trades usually get very crowded. way too much dry powder relative to the opportunity set. It’s rare to find unique angles, and just as many of these end terribly for investors. There’s a reason average returns across the sector in recent years is low single digits.
LyondellBassell roll up DIP blows Lehman away as profitable distressed trade in history. DIP equitized and within a year of exiting BK the post-reorg equity was up 10x.
Lehman had many boxes, LBHI, LBSF (some had double dip gty claims against LBHI), LBI, Bankhaus, LBIE the European entity recovered par plus post petition interest,
Tronox unsecured bonds into post reorg equity was over 5x recovery from the bonds BK lows
https://www.globenewswire.com/news-release/2019/10/31/1938440/0/en/Sano…
The CVRs traded as low as 6 cents at one point. If you were part of the litigation funding which is getting a recovery you are getting 8x on your lit funding. Most big holders average cost on the CVR was around 20 cents so getting 4.1x on the CVR. Very rare to see those kind of returns in public markets
Agreed. My PM was very happy with this trade settling this year.
Very interesting deals indeed. Has anyone came across a good example of a credit special situations investment? Would love to see some examples / case studies on that.
Ideally performing / stressed credit.
Agreed
Gordon Gekkos failed takeover of Bluestar Airlines
Only to be saved by White Knight, Lawr..Sir Lawrence Wildman
Bump
Bump for post Covid case studies.
Look at COVID rescue financings
Eventbrite - Rescue Financing (Francisco Credit Partners) - $225MM in Term Loans ($125 TL $100 DDTL) w/ high octane pricing, HEAVY call protection (NC1, 112 (!!), 110 (!), 108 )), shares of stock, and a board seat
Eventbrite Announces Financing with Francisco Partners
Flexible financing will strengthen the company’s liquidity position and reinforce its long-term growth strategy
SAN FRANCISCO — May 11, 2020 — Eventbrite, Inc. (NYSE: EB), a global self-service ticketing and experience technology platform, today announced the company has secured financing with Francisco Partners of up to $225 million. The investment will help fund the execution of the company’s long-term growth strategy, strengthen its liquidity position and provide greater flexibility to manage through a range of recovery scenarios and the return to live events.
Favorite COVID-19 related play is Citi's outperformance as agent for Revlon.
On uptiering transactions:
- Serta is my favorite only because the underlying players who won out were large credit AM funds throwing don't f*** with us elbows. I'm sure Apollo wishes they bought a few percent more . . . Board riders / Trimark were a bit more audacious and more special sitsy because they stripped covenants on top of uptiering and Mark's comments about it were pretty good.
- Also uptiering has happened behind the scenes a bunch, my firm which isn't a super aggressive firm has been involved in three unnamed examples.
The Citi agent to Revlon play aged well
Don’t mean to hijack the thread, but are there any resources out there aside from Moyer where I can read up on distressed/special sits? Interested in learning more about the space
Ditto
What specifically do you want to read on?
I’d get a subscription to petition11. Easily my favourite resource for ongoing restructuring/distressed news in the US. Their website has a ton of free articles to start with and they’re enjoyable to read.
Kind of want to learn strategies, round out my understanding of "special situations" etc.
Hi Guys super interesting thread. Similar to the guys above, trying to teach myself about distressed debt and RX. I have a RX/Distressed Case Study coming up and have been cramming the Distressed Debt Analysis Moyer book and one thing I was curious about was how do you go about determining the leverage of a distressed issuer post reorg since it has such a large impact on recoveries?
Is that a combination of comps leverage levels, leverage pre-crisis or what the cash flows can afford to service in a "new normal" situation?
Thanks in advance!
It's a recap exercise. You value the asset, then apply the new cap stack (e.g., exchange offers out of court, or takeback / reinstated debt, rights, etc. in court), and you compare the PF debt to EBITDA (more often emphasizing leverage at T+1 / T+2 ... , but always considering PF liquidty and int. coverage). You should read up on a plan of reorg for a recent Ch. 11 - detailed financials included in exhibits.
Your Q re: recoveries doesn't make sense, because post-reorg leverage doesn't affect recoveries per se -- it affects the nature / liquidity of what you receive. e.g., you have more liquidity / lower risk taking back tradable debt than private equity. And based on this breakdown, you also have a wider range of return possibilities for fulcrum holders. Items at the bottom are good data points for how much debt a company can support.
thanks for that - yes absolutely you're correct that it affects the nature of the recoveries rather than the $ amount. My question was more on what you say at the beg, e.g. "you apply the new cap stack" and how you can come up/anticipate a new cap stack for the scenario analyses.
If I take as an example a company with
Secured Bank Debt = $300
Subordinated Notes = $400
EBITDA = $100
If simplistically I have 2 post re-org scenarios:
1) low valuation/low leverage EV of 6x EBITDA and leverage of 3x EBITDA
The secured bank debt would get rolled up into new debt (and get 100% of recoveries)
The subordinated guys however would be completely equitised and would only recover $300 out of their $400 (value left $100 x 6 = $600 minus $300 = $300)
2) high valuation/high leverage EV of 8x EBITDA and leverage of 5x EBITDA
There, in addition to reinstating the secured bank debt, the subordinated guys would get $200 of exchange in a new note and equity for the rest and there would still be $ left for existing shareholders
So post re-org leverage has a huge impact on nature of recoveries and the overall approach (if sub guys do not want any equity for instance) so quite keen to understand what is the best way to have an intelligent view on this (presume a mix of peers and what the business can withstand but would be great to have views)
I think it would be unusual to get that outcome in your hypo (valuation range of 4.5-6.5x is more realistic, all else equal). Sec'd recover par no matter what, so the only question is how much debt vs. equity the subs take. They're the only impaired class there (lets ignore GUCs) so the decision is pretty much up them (although sec'd will want lower leverage all else equal). You're more likely to run into a valuation battle with pre-petition equity saying they should get a piece if the company's worth 800 and debtor only had 700 debt (what is this, a covid hospitality recovery play?)
Numbers are hypothetical, the same questions apply whichever low EV/low leverage and high EV/high leverage scenario you choose.
Understand valuation is key to determine overall $ recoveries but post reorg leverage is basically what will drive whether recoveries are in the form of debt or equity.
If you don't know that's fine maybe some who does RX/distressed all day could chime?
I think the delta in the understanding between you and the other poster is how real either of your cases could be. Yes, all else equal higher multiple plus higher leverage will result in greater overall recoveries and maybe some residual equity to the original shareholders. To get a view on exit leverage, you need to look at peer group multiples and figure out where you could best price your new cap stack. This is both an exercise in what is "market" as well as what your company can support. The peer group may be at 3x, but your company may only be able to support 2x for whatever reason. There can also be other dynamics pushing your exit leverage higher such as the mix of participants at the secured level. Some may think the company is a better credit vs. equity and prefer takeback debt, while some may be unable to take equity (such as most CLOs, but this is changing) which forces the issue of higher leverage. Some secured creditors may be uninterested in getting takeback debt and push for a cash recovery, in which case you need someone to fund that. Once you broach the issue of needing to fund something, now you're talking about a rights offering or capital markets process to raise new debt, in which case your pro forma entity can't be too aggressive or you won't be able to raise the required funding at the price you want. So yes, while you can run various model scenarios you also need to keep in mind the reality of what would need to happen in order to achieve your assumptions. We also want the post-reorg business to be successful, and putting 5x leverage on something just because you can isn't a good idea if at the end of the day you don't generate free cash flow and just become a zombie again.
by the way, did relatively well on the case study and got the gig for what it's worth, thanks all
Congrats mate! Hopefully, you will enjoy your time
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Bump. Would love to read more about what everyone has been up to/looking at. Enjoyed the posts from the HF crowd.
Amazing thread. Bump
Bump for great thread and also hopefully some help on a potentially stupid q's.
Been doing some beginner reading on some RX courses and they'd talk about situations eg
"Company trading at 5x EBITDA (eg 100m) to give 500m EV.
400m secured TLB and 200m unsecured bond.
TLB has full coverage and value break / impaired class is bond so they get to vote on any PoR...and will get made whole through issue of equity in new company"
My q's is "how does TLB get made whole"? Presumably through asset sale / company sale? So they get 400m from a 500m company sale? But then if company is sold where is the equity to make bond holders whole come from?
Or is the case that there will be a new secured TLB issued and the 200m bond replaced with new 100m bond and 100m will get equitised?
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