I Want to Learn About Distressed Debt Investing

sharpie19's picture
Rank: Baboon | banana points 154

I'm interested in learning about distressed corporate debt investing (like what Howard Marks does at Oaktree Capital).

Can anybody direct me to any resources that go over the process in identifying, analyzing, purchasing and profiting from such investments?

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Comments (95)

Oct 1, 2012

You can definitely search for this. There have been numerous discussions about books and websites to check for distressed debt.

Oct 1, 2012

Read. Moyer.

Oct 1, 2012

moyer

Oct 2, 2012

Moyer's book is fantastic, as stated previously.

Also check out Distressed-Debt-Investing.com which is a great resource for what's currently going on in the space along with some informative posts on different terms and example valuations.

If you have access to bloomberg I suggest looking at Bill Rochelle's daily distressed memo which has a couple paragraphs for a handful of the current bankruptcies going on.

Also as a side note Alpha Masters has an interesting profiles on Marc Lasry of Avenue Group that I think is worth checking out, shows how they built their business around distressed debt.

Let me know if you find anything else, I'm always interested in new stuff about distressed debt.

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Oct 2, 2012

Downloaded a copy of the Moyer distressed debt analysis book, looks like it's come with some high recommendations. Thanks guys.

Oct 2, 2012
sharpie19:

Downloaded a copy of the Moyer distressed debt analysis book, looks like it's come with some high recommendations. Thanks guys.

Did you find this for free? Amazon has it for like $80 unless I'm looking at the wrong one. Would also like a copy, heard great things.

Oct 2, 2012
WhiteHat:
sharpie19:

Downloaded a copy of the Moyer distressed debt analysis book, looks like it's come with some high recommendations. Thanks guys.

Did you find this for free? Amazon has it for like $80 unless I'm looking at the wrong one. Would also like a copy, heard great things.

http://uploading.com/files/get/0Y3ICGV2/ss08.rar

Oct 2, 2012

The book is well worth the $80. Pirating isn't cool.

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Oct 4, 2012
frank_reynolds:

The book is well worth the $80. Pirating isn't cool.

SB'd. It will make you the $80 many times over.

Oct 4, 2012

i got one from my school's library that i conveniently forgot to return ha.

Oct 4, 2012

www.distresseddebtinvestorsclub.com/ - you can get embargoed access to the investment ideas with the free account

Also discovered this gem - www.lcdcreditmarketnews.com/na/2012/10/ Not sure if its always free to get without an account, but I like reading the LCD Daily Wrap. It has also come in useful a few times for finding trading levels of less liquid term loans, etc.

Oct 5, 2012

Check out Distressed Investing by Marty Whitman.

Nov 10, 2012
idkmybffjill:

Check out Distressed Investing by Marty Whitman.

Having read both Moyer and Whitman's books, I believe you should start with Moyer. They cover many of the same subjects, and it will be hard to force yourself through the second book when it feels like you are just re-reading the same material.

Nov 9, 2012

Anybody read the chess moves in moyer? I was visualizing but it seems 8. d5 is impossible. I played it out and there is ambiguity about 6. xc3 (bxc3 or dxc3) but either way its impossible.

Full sequence to that point is
1, c4, e6
2. Nc3, Bb4
3. Nf3, c5
4. e3, Nc6
5. Bd3, Bxc3
6.[b or d]xc3, d6
7. e4, e5
8. d5

Nov 10, 2012

Check out distressed debt investing blog.

Also get a credit risk modelling book.

Nov 10, 2012

Curious as well.

I have http://www.Amazon.com/Leveraged-Financial-Markets-Comprehensive-Instruments/dp/0071746684/ref=sr_1_1?ie=UTF8&qid=1319030347&sr=8-1 on my Amazon wish list which I thought sounded relevant but I'm far from an expert in the space.

Also, per kraken's comment check out the distressed debt investing blog.

Nov 10, 2012

anything by Fabozzi

Nov 10, 2012

S&P LCD has good, free primers on High Yield and Lev Loans.

Like Unforseen said, Fabozzi is good. The Handbook of Fixed Income Securities doesn't go into too much depth on High Yield though. If you are interested, amazon has it in kindle format for cheap.

http://www.amazon.com/Corporate-Financial-Distress...
is very good, but dry as hell. It's like Fabozzi in that respect. Most people would just use it as a reference, but it might help.

Nov 10, 2012

search bar, use it.

Nov 10, 2012

"In my mind it seems like you are giving money to someone who cant really afford to say no"

Just so you know, like with everything, there are different "brands" of distressed debt investing. For example, buying a bond at 50 is not the same as providing rescue financing.

Nov 10, 2012

Distressed PE and distressed HF could have very different play - you could be at a PE fund looking for control or providing rescue financing, or you could be at a vulture fund that grasp the spread from distressed/stressed credits (like from 85 to 93 in 3 weeks are pretty awesome for HF). They way you conduct research would be similar: understanding the business/fiancials/cap structure, where is the problem etc, but the play when you put down capital is very different.

Moyer's distressed debt analysis is a good book to start, distressed-debt-investing.com is also a good place to read.

Nov 10, 2012

Moyer - Distressed Debt Analysis. Easy read and will give the basics.

Nov 10, 2012

I was just going to say "I will monkey poo anyone who responds with the book," but now I cant.

The answer would've been found by a simple google search or forum search. Additionally, this thread does not belong here and in the HF section.

Nov 10, 2012

Guy Distressed Debt after Moyer Distressed Debt are 2 solid options.

Afterwards I would get comfortable understanding the language in a credit document. Covenants, secured debt baskets, what they can and can't lien, change of control, etc.

Nov 10, 2012

I say that b/c before any real distressed investment, a buysider would go through every credit doc thoroughly and ensure they aren't getting screwed over aka making sure the document is "perfected" to what they have claims to. Then, they would buy/short different things in the capital structure based on their interpretation.

A perfect example is the Sabine/Forest Oil merger where there is a huge dispute between the change of control provisions aka some guys who bought in at 80c thinking the bonds would go to 105 when they get taken out are now sitting on bonds worth under 30c. Definitely an interesting situation...

Nov 10, 2012

OP's vision of distressed debt investing: http://www.bloomberg.com/news/articles/2015-03-12/...

Nov 10, 2012

Conceptual Overview: http://www.cravath.com/files/Uploads/Documents/Pub...
Entry Level: Stephen Moyer's Distressed Debt Analysis
Advanced (definitely worth it if you have a grasp on the basics): The Art of Distressed M&A: Buying, Selling, and Financing Troubled Companies

both books are worth the money, although i felt Moyer's book didn't delve into any of the case law and was too high-level to gain a deeper understand as to why individual legal concepts are important in the context of a bankruptcy

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Nov 10, 2012

My understanding of the Sabine / Forest merger is not that the language in the credit docs was particularly weak, but rather that the structure of the transaction was changed so that it would work AROUND the Change of Control... which I guess you could say means that the guy who bought at 80c didn't read carefully enough, or you could say that a transaction structure that gives 51%+ economic interest but only 49% voting interest just to avoid triggering a Change of Control is an unusual structure that very few people anticipated.

In any case, Whitman's "Distress Investing" is supposed to be fairly good too - disclaimer: I'm reading through now, haven't gotten very far yet, but have gotten strong reviews from others.

Nov 10, 2012

You would owe Lucille 1.5 million if you allowed her interest to compound. Subsequently, the preferred equity, Linsay and Gob's split would go down proportionally.

The only other thing you need to keep in mind is that to setup this kind of structure (A/B/Mezz/Preferred Equity/Equity), the documents of the A have to allow for it. Many senior lenders prohibit subordinate financing unless they approve it (especially Mezz). So they may not allow Michael and Lucille to become part of the structure (or at least record their lein against the property/borrowing entity).

Proceeding with this structure without without the A's permission (BSB), is generally considered an EOD and can trigger the recourse carve out language.

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Nov 10, 2012

There's always money in the banana stand. If GOB had known that, his situation would've been quite different.

Or he would've ended up in jail where the NO TOUCHING rule is in full effect.

Nov 10, 2012

Great post, just think its misleading to call Michael's loan an A note. First of all, it isn't clear what his note is secured by, if anything? It seems to me that it's an unsecured loan...

If BSB originated the whole loan and split it up, it would be a A-Note of 9M and a B-Note 2M. If Michael's loan was secured by the property, it would be a second mortgage. If it was secured by the SPE borrower's interests, it would be a mezzanine loan. From the example above it seems like an unsecured loan, with recourse directly to Gob.

Nov 10, 2012

BUMPing this cause it's still such gold.

Nov 10, 2012

This is a great post. Thanks for putting it together.

Feb 14, 2017

Sb'd. Thank you so much for the example. Reading this ~4.5 years later and it's fantastic

Mar 14, 2019

This is awesome. Huge thanks, SB'd.

Nov 10, 2012
Nov 10, 2012

I'm appalled you got a job and can't even get the name of the sector right.

Nov 10, 2012

hahahaha distressed debt, lol :)

Thanks guys

brisbane

It helps to be a girl :)

    • 2
Nov 10, 2012

drexelalum11, themacroguy,

Thanks for the links. I would appreciate any other reading material suggestions you might have for me.

Nov 10, 2012
  1. Quant requirements: Simple arithmetic
  2. Difference from IG bond trading: much wider spreads, much lower volume, much more difficult to accumulate a position of significant size
  3. Not possible, and would be too risky for any sane person to actually do
  4. As illiquid as it gets
  5. Search.
Nov 10, 2012

Thanks Omoba for the quick response, this is very helpful.

Nov 10, 2012

Here's a blog I've found interesting:
http://www.distressed-debt-investing.com/
if you're working at a bank right now, may want to see if you can get access to LCD or something like that to get tied into the info loop...

Nov 10, 2012

extremely qualitative product, think pouring over financial reports

Nov 10, 2012

Anyone know what the "LCD" that brenai referred to stands for?

Nov 10, 2012

-Quantitative requirements: not really
-Differences from IG: completely different; do your homework before posting
-Algo trading: this is the most qualitative product on the street, are you kidding
-EM distressed is as illiquid as they come; most distressed traders stay away though because of ill-defined bankruptcy laws

Nov 10, 2012

thanks for all the helpful responses guys.

Nov 10, 2012

dont forget to thank the unhelpful responders too. share the love, bro

Nov 10, 2012

From what I've heard, it seems to be a good area right now,and a good up and coming area

Hopefully someone else can expand this discussion to distressed funds

Nov 10, 2012

at a sell side bank there is distressed research (generally dont publish- help support trading desk/come up w prop ideas), distressed traders and distressed salesmen

lot less flow than a HG or HY desk, still market making but a lot of prop/fundamental analysis

great place to be right now IMO as the market is certainly entering a recession/distressed cycle

bonuses really depend on the year/performance, cant generalize

if you have the opportunity to work on a sell side distressed desk/buy side distressed fund, jump at it

im sure some of the HF guys can provide more color

Feb 14, 2017

In 20 years will FB exist? Possibly. In 20 years will companies be going bankrupt and restructuring? YES.

Feb 14, 2017

Get a copy of "The Vulture Investors". You might fall in love too.

Nov 10, 2012
HedgeKing:

On the career side, is this the time to get into this area? Or is it already building up a large pool of such talents, which down the road may result in large scale layoffs at some point, just like the MBS a few years ago?

do you find it interesting, fascinating even? if yes, then it's always a good time to get into it, otherwise, try something you do find fascinating.

Feb 14, 2017

This "phenomena" you describe is really nothing new. It isn't a long term trend or a fad, distress investing is cyclical. We are at a point in the cycle where there are a number of distressed cases. This isn't something that you just gravitate towards because you heard about it on WSO...plenty of Value-oriented shops/distressed-focused have already been playing in the "distressed world." Shops are not opening up by the thousand to capitalize on this new world of distress investing as your post seems to imply.

Feb 14, 2017

You should spent at least as much time practicing behavioral questions.

Feb 14, 2017
Feb 14, 2017

My recommendations are more useful for the sub-investment grade leveraged loan market rather than investment grade. Do you know if you're applying for a job at rating investment grade or leveraged loans/high yield?

Feb 14, 2017

Not sure yet, but my sources tell me they're looking for someone in the consumer goods group, which is typically AAA rated stuff.

Feb 14, 2017

There are a good number of LBOs in the consumer goods sector as well. In any case, a lot of the concepts in the leveraged loan/high yield space are not significantly different to the investment grade space.

I recommend you read through the Loan Market Guide on the LCD website.

Feb 14, 2017

Thanks for the info.

Feb 14, 2017

IG bonds. Probably going to want to know market pricing, whats being issues, different types of bonds, etc. LCD is a great resource. I believe it is Moody's or S&P which does a weekly market update and talks about what they are seeing in the market.

I'd probably pull a 10k and look at the capital structure and get an idea of how it looks, maturity cliffs companies face, stuff like that.

Feb 14, 2017

You should be ready to explain why pikachu is a superior choice for starting pokemon over squirtle.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 14, 2017

I got that covered. If they ask me about my greatest failure, should I talk about "The Red Gyaradose Incident"?

And thanks again for the tips guys.Focus on the Downside was a great read.

Feb 14, 2017

there is a post on wso called "focus on the downside". Google it, good basic overview.

Oct 1, 2012
mrdraper:

Hi all,

I've researched quite a bit on distressed investing on the forum and elsewhere, but have a few questions that I would like to clarify:

1. With equity investing it seems that it is much more possible to move from the private side (PE) to the public side (L/S Equity) but not vice-versa, is the same true for distressed or is it more flexible there? As a follow-on, would RX experience be a good background for both private and public debt sides and HY Research would rather (only) help with public debt funds?
2. How important would you say is to show personal investments in the HY/Distressed space in order to have a better change of getting into a distressed fund?
3. Would it be possible to move from distressed investing to deep value equity fund? (just wondering)

I hope this is also useful to some other people interested in distressed investing.
My background is M&A in Continental Europe (Tier 2 bank) and ideally would end up on the buy-side in the distressed space.

Thank you.

  1. Not sure I really understand the question as distressed investing (in practice) necessarily involves a mix of public and private situations/information. But if you're asking whether one can move from distressed to purely public HY or equity investing, yes.
  2. Minimal to no importance, and nobody would expect you to have any personal investments in distressed assets (unless they were healthy before you bought them, but that wouldn't be good for you). Distressed is not a game for private investors unless they are ultra, ultra-high net worth (ie family offices like Icahn) -- it requires a very large amount of resources to do properly since you need to be able to try and influence outcomes if things aren't going your way. (Moreover, unless you are a QIB you will not even have access to most situations.) All that said, you should know what is going on in the market enough to speak somewhat intelligently about at least a couple names if they come up.
  3. Yes, they are not very different in terms of framing an investment, in my opinion.
Nov 10, 2012

In my op I think distressed investing is the ultimate form or an extreme form of value investing. It's a very long-term, methodological investment thesis that could take many months to years to play out. There's a lot of due diligence and understanding of legal framework. Understanding the key players and motives of each creditor group is EXTREMELY important. There is some game theory elements in any super distressed asset.

In my op, the work may not always been as exciting, but there is a lot of analysis. Not exciting is referring to reading credit/legal documents. It's an interesting space to look into though. Not for the faint-hearted.

Nov 10, 2012

You should probably ask if the fund is loan-to-own vulture fund or a more timid distressed player as well. Different distressed funds have different strategies and investment processes. I'm actually surprised there hasn't been a huge inflow of DIP financing distressed players given that many of the banks are exiting the space due to regulation.

Feb 14, 2017

Also, what about Alternative Investment places within the banks? like MS alternative investments...

Feb 14, 2017

My friend just went from Goldman to Silver Point Capital. They're a solid shop that invests in distressed debt in order to convert to equity. It's cool beacuse it's like a hedge fund and a PE shop in one.

Feb 14, 2017
Feb 14, 2017

In follow up to my earlier posting re: Distressed debit investing through buying pre-foreclosure notes through auction. Has anyone been engaged in this activity. Check out www.RealtyNoteBid.com and let me know your thoughts...has anyone used them. Do you have any other resources / info that might help in my understanding this investment channel.

propinvest007

Feb 14, 2017

Seems like mostly single family, not too many listings. How new is it?

AL (1)
AZ (1)
CA (7)
FL (2)
GA (3)
IL (1)
IN (3)
MI (2)
OH (4)

I recently worked a little bit on pre packaged CRE bankruptcy/foreclosure. Assuming there is only 1 lender and developer borrower, you will want to have both the borrower and lender willing to go with your plan, unless you want to factor in up to 2 years of delay. Borrowers can be a bitch if they want to drag it out in court, if they declare personal bankruptcy, then everything freezes... if they want to counter sue the lender for whatever.... long story short, getting your hands on a property can take many times as long as just buying the note. Lots of lenders/investors pay borrowers to go away. Ironically because borrowers can cause so much delay, sometimes i think the go away money is more than their original equity (hypothetical: borrower put up 1mm to take out 30mm loan, now gets 2mm to go away). The loser then becomes the lender(and the lender's investors) when they write a loan down to 40% original value. But if a lender needs the money to keep a CDO floating, then they dont have a choice but to mark it down. Also while borrower/lender/investors fight it out in the court, properties are usually not maintained, if there is a leaky pipe somewhere, and you get the property a few months later, that can be tons of damage. Unfortunally for any big deals, there are usually multiple lenders, if the lenders can't agree, then you wont ever get a deal going.

To build a model probablly takes a few hours, but there is always lots of uncertainty. Dont buy something pre foreclosure unless you are sure you can get the property within your timeline.

Feb 14, 2017

People who are in this field typically began in a related role. This is one area where rubber-stamped certifications don't necessarily mean much. An MBA means you were smart enough to get through the application process and willing to fork over the cash and forego two years of income, not that you have technical competency or alpha-generating ability.

Common backgrounds within the distressed investment space are places like the elite restructuring practices (historically, a place like Rothschild, Blackstone, Evercore, Lazard, Miller Buckfire, etc.), distressed trading desks at bulge bracket banks, proprietary special situations groups, distressed or turnaround PE, bankruptcy law, and the like. As you can see, these all share a quantitative theme. Breadth of knowledge may be narrower than required for a role as a standard coverage banker, but depth required is far greater.

To keep this brief, your primary qualification is going to be your work experience, not a certification or degree you obtain. Focus on gaining meaningful, relevant, hands-on, practical experience in some role that exposes you to restructuring, distressed debt, turnaround consulting or management, or the like. The competency you gain from living and practicing it yourself will outweigh whatever someone else has on paper (except the freakishly rare JD/MBA from Harvard with summer associate experience at Goldman, York Capital, and McKinsey who decides he wants the spot you're interviewing for at Centerbridge ... and even in that case, he's got the work experience to complement the school and degree).

For example, everyone here fervently worships the exit opps the Blackstone Restructuring kids get. Well, the exits are not so much a result of the brand name of the firm as they are a function of the skill-set the analysts have picked up. Each class is 6-8 people, meaning there are 15 analysts total in the practice. There is no double-staffing. Unlike a blockbuster deal at GS or MS, you're never going to see two analysts, an associate, VP, MD, and partner (if GS or top boutique) all on the same team. There will be one analyst, an associate, and either a VP or MD. That's it. And that analyst is going to drive all the (you guessed it) analysis on that deal, start to finish. Do that for 80-110 hours a week for two years and there isn't a fund that isn't going to want to talk to you. (As a side note, I've seen posts on here [granted, they are dated by now] about how the hours in BX RX are so much more manageable than M&A. I don't believe that's true. Yes, you can easily walk out the door at 7:00 if you don't have anything on your plate. If you do though, you may well stay until 6am and be back three hours later to start your next day).

This wound up not being brief, but as I said, the main takeaway should be that you need to get the best work experience you can; no qualification or degree will be a magic pill that makes you hirable.

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Feb 14, 2017
APAE:

Great post. The only thing I would add is that at the junior end of things it is also possible to break in from IBD industry/M&A groups, also leveraged finance as well. You are not expected to be an expert in distressed from day one, but what funds really do care about is being able to value companies properly - as bottom-up, fundamental investors this is absolutely imperative. They are more than happy to teach you the intricacies and specifics of investing in distressed situations, provided you are highly motivated (reading relevant literature in your own time, etc.). That being said, the more related knowledge you have going in the better, and you can't beat restructuring in this regard, really. Specific qualifications are irrelevant. Get a good bachelors degree in order to get yourself into a good bank and work very hard - that's what you need.

Feb 14, 2017
Murut:

Surely. I did not mean to stress that as much as I did, blame it on the late hours. In general, the strongest groups at top banks (all the known heavy-hitters people so fervently worship on this site) will have the quality dealflow that will get you looked at by headhunters. From there, it is a matter of expressing your interest positively, conducting adequate research and preparation, and nailing any interview you get.