What do you do in your spare time? I read bankruptcy dockets.

On April 16th, 2012, a company based in Ronkonkoma, New York filed for bankruptcy. The company's name is Integratas Security Corporation. Integratas employs 366 people who provide day to day guard services across the tri-state area. Because of increased competition (including a competitor started by one of its former employees) in the face of weakening customer demand, Integratas is unable to pay its debt and has filed bankruptcy in the Eastern District of New York (Central Islip).

In its first day motions, Integratas notes that it has entered into an Asset Purchase Agreement (APA in the bankruptcy world) with one of its competitors. The terms of the APA are as follows:

  • $750,000 consideration, with which $250,000 is due at the close of the sale, with the balance paid out based on a formula that could ratchet the price down.
  • In exchange, purchaser will receive assumption and assigned of service contracts of Integratas, vehicles and equipment, and the trademark name
  • The full purchase price is predicated on producing revenue of at least $6.9 million, one year subsequent to closing
  • There is a customary break up fee and overbids
There will be an auction to determine if there will be a higher bid for the company. That auction is scheduled for June 6th, 2012 in Jericho, NY. Competing bids are due by the 1st of June.

For those interested, here is the docket: Integratas Pacer Link

When people ask me what I do for a living, I tell them I invest in junk bonds and bankrupt companies. Most people's knowledge of distressed investing ends with Richard Gere

Let's run a quick thought experiment: In 20 years, of the four items below, what is the most likely to be around?
  1. Facebook
  2. Google
  3. Apple
  4. bankruptcy
Since the dawn of lending, millions of individuals and institutions have mispriced their ability to repay their debts.  I am not quite sure if it is more hope or more greed, but, usually at the most inopportune times, lenders extend far too much credit, and debtors take on far too much of a burden, and the result is bankruptcy (I will use the term bankruptcy and restructuring interchangeably in this post). Bankruptcy is here to stay.

The problem of course is bankruptcy is ugly. Our representation in the press is this:

And bankruptcy is complex. It is oh, so complex. Seth Klarman has publicly stated that Baupost had one analyst that just looked at Enron, solely, for a number of years. Complex org charts, upstream vs downstream guarantees, rejection claims, pension negotiations, dual tracks, conflicting valuation assessments, Rule 2004 discovery, releases, etc is just the beginning.

And it is opaque. The most disgusting business out there are transcription services that charge $500-$1000 for a copy of a court transcript. Someone tell me how to disrupt that, and I may just invest in your company immediately. There is a service that arguably 1% of the investing world (CourtCall) knows about that one must register with, and then pay $50, to listen to court proceedings. PACER still charges you for access fees. The time information is posted to a docket to what happens in the court can take days. Club deals abound like no where else.

But all these create investment opportunities that I think are unparalleled in the public investment universe.

One of the anecdotes Warren Buffett, distressed investor himself, tells students is that long ago, he would pick up Moody's stock manuals and start with A. It is a good exercise. Via the media, the public is exposed to maybe 10% of the U.S. invest-able stock market. By relentlessly going through the alphabetized list of names, enterprising investors can catch bargains that are in boring businesses (ugly), with uncertain prospects (complex), that rarely disclose anything to investors (opaque). Sound familiar?

The reason I gave the above example about Integratas was not because I think its a particularly compelling investment. But I do think an investor would be better spent learning the securities industry in the tri-state area than spending time reading Microsoft's 10K where they will compete with legions of investors. I bet you no more than 10 people knew about the Integratas acquisition before this post. Let's say you can eek 5% margins on the $7M of revenue or 350k of EBITDA. Versus a purchase price of 750k (and only 250k due up front), that doesn't look like a terrible investment at all.

I could read bankruptcy cases all day long. That may be a sick sick thing to say but the stories of these companies are simply riveting. And because I have done this for some times, the opacity begins to melt away, and the trove of information is incredible. Some information released on dockets would scare public companies. But with that information, an astute investor can, in my opinion, get closer to the intrinsic value of an enterprise.

Sometimes its hard to invest in these enterprises. Trade claim shops probably do it best by sourcing their own claims by "dialing for dollars" (i.e. calling listed creditors and offering a % of par for their claim). Though that can be administratively expensive unless you are dolling out 5 figures a purchase and you do not have your ducks in a row.

Author Note: I do not know the distressed private equity industry as well as I should. Lynn Tilton's Patriarch Partners is one that you hear about most often. I'd be curious if readers had any other names I should get to know that participate in companies with EV's less than $50M that play across the capital structure in loan to own strategies. Please shoot me an email with suggestions.

With the markets currently in a bit of "shaky patch" and most distressed debt guys I know reading everything they can about CAPP coal and legacy liabilities (see: PCX), it is starting to get more fun and interesting out there.  New issue concessions are definitely high and the bull trade / thesis rests on an ECB or Bernake put. We are still no where close to time to drain the penny bank into the market, but it feels a lot more fairly valued to a whisper of cheap, out there. There still isn't a lot of pain though or really panic as the sell offs have seem orderly.

I am very very lucky to have been exposed to a part of the market that few experience early in my career. People ask me "How do I get involved in distressed?" Start with A. Find a case in a local district of yours and follow the proceedings closely. Call some of the creditors and see if they will part with their claims. Talk to the lawyers and get to know some of the players involved in the space. Head to the court and sit in on a proceeding. By doing this with one or two cases, you'll learn more than you ever sitting in a class. And maybe, just maybe, you'll find an opportunity that you can plow significant capital into and come out with out-sized gains because you were the only one in the world paying attention.


Ankit Gupta 5/31/2012  

There are opportunities to swim up and down the value chain with those big names and also to their competitors.

For example - if you view Facebook as an advertising platform, then compare them with something like Google and Clear Channel Outdoor Holdings. Social network vs. Search vs. Billboard. One of those 3 has regulation limiting US based competition.

Everyone and their mother knows Geico, Progressive, and so on, but I would argue very few are even aware of Verisk's existence and their impressive market share. Verisk's economics are amazing and they have a central position that is going to be tough to dislodge.

There's obviously the big question of price, but I do agree in general that we should be searching around looking in places where others haven't looked. I'm still very very new to this, but I think we can find businesses that we understand better than others, because it really does seem like there aren't that many people out there that will do the necessary homework. Even when I come across those who are looking at the same security, the research can sometimes stop at "this is exciting." The next step of reading their competitor's 10-K's as well puts you in a really small bucket.

I think there can be an advantage in focusing on non-consumer-facing businesses, because they're not as easy to relate to. We don't communicate with them as consumers and they don't play a direct role in our life.

I'm a novice to all of this, but there is a ton to really dig into.

Nikhil 5/31/2012  
This comment has been removed by the author.
Anonymous,  5/31/2012  


Fantastic post. I definitely agree with you that the complexity of the distressed world (and perhaps various aspects that structurally block certain investors like ratings mandates etc) does not permit many investors from participating. Only those who can navigate the process of BK and the extra level of litigation overhang, etc. can do it well...

But doesn't that mean that by choosing to engage in distressed investing, one is voluntarily jumping into an arena - albeit a much smaller arena vs. MSFT investing arena, etc. - full of the Bauposts, Oaktrees, GSOs, etc of the world? The investing community around the blue chips is much larger but has a substantial portion of "dumb money" whereas when you're competing with the brightest together in a smaller room, doesn't that make it more difficult to get an edge in distressed?

Anonymous,  6/01/2012  

If the transcription services are expensive and Bloomberg does not offer blanket coverage where does one go to access the information free of charge? Silly question perhaps.

Anonymous,  6/01/2012  

KPS Capital Partners is a distressed PE shop that kicks major ass. They've been incredibly successful turning around middle market businesses.

Anonymous,  6/01/2012  

Catalyst capital out of toronto is a good shop

Anonymous,  6/08/2012  

What is the best way to find out about local bankruptcies? I am assuming local municipalities list this somewhere on their website. Or do you have to actually go down to city hall?

I would love to follow a few proceedings in my local area to learn more before possibly investing.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.