Favorite Distressed/Special Situations Plays?

m_1's picture
Rank: Senior Neanderthal | 5,872

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...

Comments (46)

Sep 16, 2019

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.

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Oct 2, 2019

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.

Sep 16, 2019
Sep 16, 2019

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,

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Sep 16, 2019

For a more recent one, Blackstone GSO and Codere SA. Trigger-and-refinance deals are so ballsy it's hard to hate.

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Sep 18, 2019

The partner that did this trade had to leave GSO - noow running his own shop

Sep 18, 2019

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.

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  • 1st Year Analyst in Investment Banking - Mergers and Acquisitions
Sep 16, 2019

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.

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Sep 17, 2019

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.

Array

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Sep 19, 2019

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.

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  • 1st Year Analyst in Investment Banking - Mergers and Acquisitions
Sep 20, 2019

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.

Sep 20, 2019

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.

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Sep 28, 2019

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.

Sep 16, 2019

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.

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Sep 17, 2019

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.

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Sep 17, 2019

Thanks for the detail here. I find the digital entertainment space really interesting, need to do some more reading.

Sep 17, 2019

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

Most Helpful
Sep 17, 2019

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.

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Sep 17, 2019

Brutal. Kind of like Howard Marks always says...

"Being too far ahead of your time is indistinguishable from being wrong."

Sep 18, 2019

Baupost, DK, Anchorage, etc vs. Iceland

  • 2nd Year Associate in Corporate Development
Oct 3, 2019

What does DK stand for?

Oct 3, 2019

davidson kempner

Sep 27, 2019

Are any of these available online as case studies?

Sep 28, 2019
Sep 28, 2019

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?

Sep 28, 2019

@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!

Sep 28, 2019

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.

Sep 28, 2019

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

Sep 29, 2019

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.

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Sep 29, 2019

Never fuck with Paul Singer. Elliot has done some really wild things...

Oct 2, 2019

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

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  • Investment Analyst in Hedge Fund - Event Driven
Oct 2, 2019
Comment
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  • 2nd Year Associate in Corporate Development
Oct 3, 2019