Distressed Debt Investing

This course covers distressed debt analysis and investing, focusing primarily on corporates but also including financial institutions and sovereign debt as special topics.

The program begins with the foundations of the distressed debt market, causes of and early warning signals, possible outcomes and how to evaluate the probability of outcomes in different scenarios.

Restructuring is reviewed in detail, as well as estimation of sustainable debt levels, business valuation and the importance of capital and group structure. Differences between active control and passive non-control investments are highlighted, including stakeholder tactics and due diligence.

Case studies cover a variety of companies across sectors and geographies, challenging delegates to make investment decisions on real distressed debt situations.

• Distressed debt investors, Loan portfolio managers and Private equity investors
• Hedge fund managers
• High yield credit analysts and Equity analysts
• High yield asset managers and Mergers and acquisitions bankers
• Debt capital markets/leveraged finance bankers
• Business turnaround/restructuring accountants/corporate finance professionals
• Lawyers
• Strategy consultants

• Basic understanding of financial statements
• Basic familiarity with Excel
• Familiarity with high yield debt useful but not essential

Introduction and course outline

Foundations

• What is Distressed Debt?
• Distressed Debt market background – size, participants, historic returns, composition (corporate, financial institution, sovereign)
• Causes of and early warning signals for corporate financial distress and implications for resolution
• Outcomes for Distressed Debt – remain performing, liquidation, or restructuring
• How to evaluated whether Distressed Debt will remain performing or whether impairment will occur:
• Business assessment – products, competition, customers, company
• Financial assessment – financial statement analysis, forward-looking financial modeling, key credit metrics, covenant compliance testing, liquidity analysis, and debt service capacity
• Instrument assessment – covenant, seniority, security, and guarantor protection
• Strategic flexibility – scope for asset sales, secured financing, sale and leaseback transactions, and equity raising

Example: New World Resources Plc (Central European hard coal and coke producer)

Workshop: Evaluating whether Norske Skogindustrier ASA’s (Norwegian newsprint and magazine paper producer) senior unsecured bonds will remain performing

Distressed Debt Restructuring

• Approaches 
• Out-of-court restructurings – voluntary and coercive exchanges, holdout problems
• In-court restructurings – pre-packaged or pre-negotiated vs post petition, process
• Key elements of bankruptcy law – US, Europe, UK
• How to estimate the sustainable level of debt for the business around which the restructuring will be designed
• Business valuation – EBITDA multiple and DCF approaches
• The importance of capital structure, group structure, and intercreditor agreements in estimating recovery value
• Complexities arising in group structures spanning several legal jurisdictions

Example: Wind Hellas (Greek mobile operator)

Workshop:  How is Codere SA (international gaming company) likely to be restructured and are its senior unsecured bonds a good investment opportunity?

Distressed Debt Investing

• Distressed Debt Investing as scenario-probabilistic investment
• Sought-after characteristics in a distressed debt investment
• Active control vs. passive non-control investors
• The interplay of different stakeholder objectives and conflicts – identifying the fulcrum capital and stakeholder tactics
• Due diligence – business, financial, instrument, legal

Example: Countrywide (UK estate agent)

Example: Truvo (European directories business)

Workshop: Are SolarWorld AG (solar power products company) bonds an attractive investment?

Special Topics in Distressed Debt Investing

• Financial Institutions Distressed Debt Investing – how are failed banks and insurance companies restructured and resolved? How will their restructuring and resolution change going forward in a new environment of special resolution regimes, bail-in and contingent convertibles?

Example: Anglo Irish Bank (Irish commercial real estate lender)

Example: Groupama SA (French insurance company)

• Sovereign Distressed Debt Investing – dealing with sovereign liquidity and solvency problems; assessing sovereign debt sustainability; the role of politics

Example: Greece Private Sector Involvement

Workshop:  Is there a good investment opportunity in Banca Monte Dei Paschi di Siena Spa’s (Italian retail bank) capital structure?