Comments on Distressed Debt Investing: Simplified Distressed Debt Recovery Analysis

On valuing the equity in the reorg, wouldnt a much...

2009-09-10T00:00:26.351-04:00

On valuing the equity in the reorg, wouldnt a much easier and feasible way be to take the enterprise value, less the new total debt amount in the BK company at emergence from BK (using the pro forma cap structure), and simply divide that equity amount by shares out?

Excellent outline to the process. One point assum...

2009-09-09T17:45:39.711-04:00

Excellent outline to the process. One point assumed, but feel readers should be reminded of, is the importance of knowing the debt priorties (secured vs unsecured, guarantees etc)as it impacts priority of recovery. I believe Hunter has pointed this out in the past.
Sami's point is one that drives everyone "mad" as there is no "science" governing how much leverage; it is a negotiation amoungst different creditor classes, though needs to be tied to your valuation work. In my experience "industry peers" leverage can help you as either comp or starting point for leverage. One item to remember is the a restructed company needs an implied equity cushion under the new debt structure. The fact the the company filed bankruptcy may suggest a riskier business profile than peers and therfor need a larger equity cushion than peers(hense lower leverage).

great post. A question: how do you get to the le...

2009-09-09T14:06:39.579-04:00

great post.

A question: how do you get to the leverage level. the 3x is assuming an industry peer but don't ch 11 companies can sustain less leverage than peers?

I assume you go through this analysis before the proposal as the proposal has the recoveries outlined?

Although your go-to models should certainly not be...

2009-09-09T13:46:38.832-04:00

Although your go-to models should certainly not be shared, it would be interesting to see a short form model, or some kind of quick mock up, if you have one, just to see how you do things; I've been on restructuring deals in the past, so while the analysis is similar, I think the mechanics nuances are a little different, and it would be cool to see them in a model (and obviously illustrative for all those who have no restructuring/distressed experience)

If not, completely understandable. Thanks for writing! Always refreshing to read your informative posts!