Before I begin diving into various situations on this blog, I want to make sure everyone understand some of the fundamental terms and definitions in the vocabulary of a distressed debt investor. I will continue to add to this directory as situations become more complex. Everyday I am learning something new as well.
- Why are covenants important? Covenants are the line in the sand that distressed debt investors dare companies to walk across. If the companies do fail their covenant tests, and lenders / creditors do not wave the covenant default, the company will get on their knees and start begging for mercy or file for bankruptcy. Now, many investors do not want a company to violate their covenants - they want the company to continue doing well and paying them timely interest and principal when it comes due. Unfortunately, that isn't always the case.
- Why are forebearance agreements important? They are important because this is the period where a lot of negotiations between parties go on. Specifically a...
- Why are prepacks important? Getting a viable company out of bankruptcy as fast as possible is almost always the goal. If various parties can agree on a solution it makes little sense to waste time, buring capital in bankruptcy.
- Why are guarantors important? Figuring out who is on the hook for what allows investors to value how many assets support a given security. We are trying to figure out "where the value flows." More importantly, if two nearly identical bonds are guaranteed by different entities, their recovery in bankruptcy will be completely different.
- R.H. Donnelley Corp is a holding company (Holdco). Generally equity is issued out of the holdco.
- R.H. Donnelley Incorporated is an operating company (Opco)
- Dex Media Inc is an intermediate holding company (Intermediate Holdco)
- Dex Media East and Dex Media West are operating companies (Opcos)
- Why is all this important? All else being equal, opco's will have better recoveries in bankruptcy versus the holding company. This is due to structural subordination. The closer you are to the operating assets the better.