Clients are continually worried about their credit score. It isn't uncommon for
Finding Opportunities During And After Bankruptcy
In my last post, I discussed how bankruptcy is not always a bad thing for companies or investors. I liken the process to recycling, where the useful pieces of something that would have otherwise been discarded are broken down and turned into something new and valuable to society. The alternative to restructuring under Chapter 11 is to allow these companies to continue operating inefficiently and burning through capital that could otherwise be deployed to move the economy forward.
In this post, I’ll discuss what investors should be aware of with companies during their bankruptcy proceedings and in the period afterward as the companies look to rebuild.
Experience has demonstrated that when distressed companies are in trouble money can be made by investing long in their distressed corporate bonds and loans at pennies-on-the-dollar. But successfully investing in bankrupt companies requires considerable painstaking fundamental research and analysis to separate the gems from the duds.
One of the first indicators my team looks for is an extraordinarily cheap valuation relative to existing and projected cash flow. Where appropriate, we also carefully analyze a potential liquidation of the company to determine the likely outcome from a worst-case scenario. In addition, we continually monitor our positions, using real-time updates from the Federal Bankruptcy Court dockets as well as other tools that we have developed over 18 years in this business. Another important consideration that we consider is the company’s tax attributes – in certain situations, these can be very valuable for the soon-to-be-reorganized company. In cases where we think it’s prudent, we will also seek to take an active role in the company’s reorganization, by working with boards of directors and/or with creditor committees.
I’ve done this many, many times in the past but my stint on the creditor committee for Tropicana Entertainment (the casino company now controlled by Carl Icahn) was particularly memorable. In that restructuring, secured lenders in our class became the so called “fulcrum security” which received the lion’s share of the company’s newly-issued equity when it emerged from bankruptcy. This was possible only due to outstanding negotiation tactics at the creditor committee level.
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