| Notes on Style | p. xiii |
| Acknowledgments | p. xiv |
| About the Author | p. xv |
| Web Added Value | p. xvi |
| Introduction | p. 1 |
| An Example of a Distressed Debt Situation | p. 2 |
| What Is Distressed Debt? | p. 6 |
| Investing in Distressed Debt | p. 8 |
| The Distressed Debt Investment Opportunity | p. 13 |
| Financial Restructurings in the 2000-2003 Era | p. 14 |
| Precursors to Default | p. 22 |
| Economic Performance | p. 23 |
| Relative Quantity of Low-Rated Bonds | p. 25 |
| Capital Markets Liquidity | p. 28 |
| Market Conditions That Permit Superior Returns | p. 32 |
| Equal Access to Information | p. 33 |
| Rational Behavior | p. 35 |
| Low Transaction Costs | p. 39 |
| Summary | p. 41 |
| Conceptual Overview of Financial Distress and the Restructuring Process | p. 43 |
| A Simple Model of the Firm | p. 43 |
| Extensions of the Basic Model | p. 45 |
| A Conceptual View of Financial Distress | p. 49 |
| How Restructurings Attempt to "Fix" the Distress | p. 52 |
| Summary | p. 53 |
| Legal Overview of Distressed Debt Restructurings | p. 55 |
| Out-of-Court Restructurings: The Preferred Option When Effective and Feasible | p. 56 |
| The Financial Effects of an Out-of-Court Restructuring | p. 56 |
| The Out-of-Court Restructuring Process | p. 59 |
| Parties Involved | p. 59 |
| Strategic Considerations in Participating on the Bondholder Committee | p. 61 |
| Beginning the Process | p. 64 |
| Implementing the Restructuring | p. 67 |
| Feasibility: The Holdout Problem | p. 68 |
| Summary | p. 70 |
| In-Court Restructurings: An Overview of the Bankruptcy Process | p. 71 |
| Declaring Bankruptcy | p. 72 |
| Jurisdiction of Filing | p. 73 |
| Timing of Filing | p. 73 |
| The Goal: The Plan of Reorganization | p. 76 |
| The Role of Exclusivity and Prefiling Coordination | p. 76 |
| Content and Structure of the Plan | p. 78 |
| Operating Under Chapter 11 | p. 80 |
| Stabilizing Operations | p. 80 |
| Developing a Going-Forward Business Plan | p. 83 |
| Determining the Assets and Liabilities | p. 84 |
| Determining the Valuation and the New Capital Structure | p. 87 |
| Voting on and Confirming a Plan of Reorganization | p. 89 |
| Summary | p. 92 |
| Overview of the Valuation Process | p. 95 |
| The Basics of Cash-Flow-Based Valuation | p. 96 |
| Using EBITDA as a Measure of Cash Flow | p. 96 |
| Understanding and Adjusting EBITDA | p. 97 |
| Limitations of EBITDA | p. 102 |
| Comparing Discounted Cash Flow and EBITDA Multiple Approaches | p. 103 |
| Comparable Company Analysis Based on Enterprise Value | p. 104 |
| Calculating Enterprise Value | p. 105 |
| Determining the Correct Multiple | p. 109 |
| Using Comparable Company Analysis | p. 112 |
| Alternatives to the EBITDA Multiple Approach | p. 114 |
| Revenue-Based Valuations | p. 115 |
| Asset-Based Valuations | p. 115 |
| Customer-Based Valuations | p. 116 |
| Liquidation Valuations | p. 117 |
| Summary | p. 117 |
| Leverage and the Concepts of Credit Support and Capacity | p. 119 |
| The Interrelationship of Credit Risk and Credit Support | p. 119 |
| Credit Risk | p. 120 |
| Credit Support | p. 120 |
| Credit Capacity | p. 121 |
| Credit Capacity as Measured by Debt Repayment Ability | p. 123 |
| Stable Cash Flow Scenarios | p. 123 |
| Volatile Cash Flow Scenarios | p. 126 |
| Debt Capacity Under Alternative Criteria | p. 129 |
| Asset Coverage | p. 129 |
| Ability to Refinance | p. 132 |
| Interest Expense Coverage | p. 133 |
| Capital Instruments Designed to "Avoid" Credit Capacity Criteria | p. 134 |
| Exchangeable Preferred Stock | p. 135 |
| Convertible Bonds | p. 135 |
| Discount Notes and Payment-in-Kind Notes | p. 135 |
| Summary | p. 136 |
| Capital Structures and the Allocation and Management of Credit Risk | p. 139 |
| Using Corporate and Capital Structures to Allocate Credit Risk | p. 141 |
| Grants of Collateral | p. 142 |
| Contractual Provisions | p. 142 |
| Maturity Structure | p. 144 |
| Corporate Structure | p. 146 |
| How Capital Structures Manage Credit Risk | p. 149 |
| Leverage | p. 151 |
| Priority | p. 151 |
| Restricted Payments | p. 151 |
| Negative Pledge Clauses | p. 156 |
| Time | p. 157 |
| Performance Covenants | p. 157 |
| Put Rights | p. 158 |
| Forced Call in the Event of a Downgrade | p. 158 |
| Performance-Linked Pricing Provisions | p. 159 |
| Summary | p. 160 |
| Causes of Financial Distress and the Restructuring Implications | p. 163 |
| Indicators of Financial Distress | p. 163 |
| Debt Ratings | p. 164 |
| Predictive Models | p. 166 |
| Market Prices | p. 167 |
| Causes of Financial Distress | p. 168 |
| Performance Materially Below Expectation | p. 169 |
| Economic Downturn | p. 169 |
| Uncompetitive Product or Service | p. 170 |
| Unrealistic Business Plan | p. 172 |
| Poor Management | p. 174 |
| Near-Term Liquidity Issues | p. 177 |
| Bank Debt Scenarios | p. 177 |
| No Bank Debt Scenarios | p. 178 |
| Unexpected Liabilities | p. 180 |
| Tort Claims | p. 180 |
| Contract Liabilities | p. 181 |
| Crisis of Confidence: Fraud and Other Events That Create Financial Uncertainty | p. 183 |
| Reliability of Historical Financial Data and Valuation Issues | p. 184 |
| Liquidity and the Likelihood of Bankruptcy | p. 185 |
| Summary | p. 187 |
| Options for Alleviating Financial Distress: The Company's Perspective | p. 189 |
| Properly Assessing the Distressed Firm's Likely Actions Is Key to Assessing the Investment Outcomes | p. 190 |
| Playing the Waiting Game | p. 190 |
| Between a Rock and a Hard Place | p. 194 |
| Summary | p. 198 |
| Strategic Options to Resolve Financial Distress Outside Bankruptcy | p. 200 |
| Raise Additional Capital | p. 200 |
| Asset Sales | p. 201 |
| Secured Financings | p. 202 |
| Sale/Leaseback Financings | p. 204 |
| Equity Sponsors | p. 204 |
| Reducing Leverage | p. 207 |
| Open Market Repurchases | p. 207 |
| Direct Purchases from Holders | p. 207 |
| Cash Tender Offers | p. 208 |
| Exchange Offers | p. 211 |
| Coercive Exchange Offers | p. 211 |
| Noncoercive Exchange Offers | p. 212 |
| Constraints on the Range of Options | p. 213 |
| Liquidity | p. 213 |
| Time-to-Liquidity Event | p. 213 |
| Magnitude of Problem | p. 214 |
| Complexity of Capital Structure | p. 214 |
| Severability of Business Units | p. 215 |
| Cause(s) of Financial Distress | p. 215 |
| Strategies When Bankruptcy Appears Necessary | p. 215 |
| Maintaining Liquidity | p. 215 |
| Preplanned Filings | p. 216 |
| Summary | p. 217 |
| Profiting from Financial Distress: The Investor's Perspective | p. 219 |
| Defining the Investment Objectives | p. 220 |
| Tailoring a Strategy to the Investment Objectives | p. 221 |
| Non-Chapter 11 Situations | p. 222 |
| Passive Involvement | p. 222 |
| Active Involvement | p. 224 |
| Chapter 11 Situations | p. 228 |
| Feasibility Considerations | p. 238 |
| Capital Structure | p. 238 |
| Market Versus True Valuation | p. 240 |
| Market Liquidity/Concentration of Holdings | p. 241 |
| Other Distressed Investors | p. 241 |
| Bank Debt | p. 242 |
| Large Block Holders of Public Debt | p. 242 |
| Hedging and Capital Structure Arbitrage | p. 242 |
| Return Potential of Capital Structure Arbitrage | p. 243 |
| Common Capital Structure Arbitrage Trades | p. 249 |
| Pari Passu Securities with Different Maturities | p. 250 |
| Senior Versus Junior Securities | p. 252 |
| Bonds Versus Equity | p. 254 |
| Summary | p. 256 |
| Practical Aspects of the Investment Process and Due Diligence | p. 257 |
| Practical Realities of the Investment Analysis Process | p. 258 |
| Screening Situations to Prioritize Opportunities | p. 258 |
| Reacting to Volatile Situations | p. 260 |
| A Time-Efficient Valuation Methodology | p. 260 |
| Performing Due Diligence | p. 262 |
| Diligence Cost-Benefit Analysis | p. 262 |
| Prioritizing the Diligence Issues | p. 263 |
| Financial Due Diligence | p. 267 |
| Basic Goals of Financial Due Diligence | p. 267 |
| Obtaining Publicly Available Financial Information | p. 268 |
| Accessing Management | p. 270 |
| Special Valuation Considerations in Financially Distressed Contexts | p. 272 |
| Business Deterioration During a Reorganization | p. 272 |
| Reorganization Costs | p. 273 |
| Critical Vendor Payments | p. 273 |
| Cash Accumulation During the Reorganization | p. 275 |
| Tax Issues | p. 276 |
| Liquidity Implications of a Distressed Firm's Current Tax Status | p. 277 |
| Potential Value from Carryforward of Net Operating Losses | p. 279 |
| Priority Status of Tax Claims | p. 284 |
| Legal Due Diligence | p. 284 |
| Obtaining the Relevant Documents | p. 285 |
| Checklist of Legal and Bankruptcy-Related Issues to Consider | p. 286 |
| Voidable Preferences | p. 287 |
| Substantive Consolidation | p. 287 |
| Structural Advantages | p. 288 |
| Equitable Subordination | p. 289 |
| Zone of Insolvency | p. 292 |
| Special Considerations When Investing in Claims That Are Not Negotiable Instruments | p. 292 |
| Recent Developments Under the Sarbanes-Oxley Act of 2002 | p. 295 |
| Mechanics of Accumulating the Investment | p. 296 |
| Investment Strategy and Market Environment Drive Accumulation Approach | p. 297 |
| Consummating the Trade | p. 300 |
| Firm Market | p. 302 |
| No Market or Above-Market Offering | p. 303 |
| Settling the Trade | p. 304 |
| Bank Debt | p. 305 |
| Holder Identity | p. 305 |
| Settlement | p. 305 |
| Special Considerations for Revolving Loans | p. 306 |
| Summary | p. 307 |
| Dynamics of the Workout Process: The Endgame | p. 309 |
| The Parties | p. 310 |
| The Debtor | p. 310 |
| Debtor's Bankruptcy Counsel | p. 311 |
| Debtor's Financial Advisor | p. 311 |
| The Committee | p. 311 |
| Committee Legal Counsel | p. 313 |
| Committee Financial Advisor | p. 314 |
| The Secured Creditors | p. 314 |
| The Bankruptcy Judge | p. 315 |
| Types of Chapter 11 Cases | p. 316 |
| Preplanned Restructuring | p. 318 |
| Full Prepack | p. 318 |
| Prenegotiated Filings | p. 320 |
| Asset Sales | p. 321 |
| Sales Intended to Enhance Recoveries by Maximizing Estate Value | p. 322 |
| Sales Designed to Maximize Creditor Recoveries | p. 326 |
| Free-Fall and Contested Chapter 11 Reorganizations | p. 326 |
| Sources of Leverage in the Chapter 11 Process | p. 327 |
| Delay | p. 328 |
| Management and the Right of Exclusivity | p. 329 |
| Creditors and the Threat of Litigation | p. 331 |
| Priority | p. 332 |
| Secured Creditors | p. 335 |
| Valuation | p. 336 |
| Voting and Confirmation | p. 339 |
| Voting | p. 339 |
| Confirmation | p. 341 |
| Summary | p. 346 |
| Postreorganization Considerations | p. 349 |
| Postreorganization Equities | p. 350 |
| Size of Expected or Probable Market Capitalization | p. 350 |
| Postreorganization Trading Float | p. 352 |
| Forced Sellers | p. 353 |
| Company Profile | p. 354 |
| Postconfirmation Lockups | p. 355 |
| Tax-Based Trading Restrictions | p. 356 |
| Warrants | p. 356 |
| Trading Performance of Back-End Equities | p. 356 |
| Postreorganization Debt Securities | p. 359 |
| Liquidating Trusts | p. 360 |
| Summary | p. 365 |
| Endotes | p. 367 |
| Literature Survey and Selected References | p. 405 |
| Chess Notation and Game Moves | p. 433 |
| Disclosure of Possible Conflicts of Interest | p. 435 |
| Index | p. 437 |
| Table of Contents provided by Rittenhouse. All Rights Reserved. |
