[hawk59]

Realize that in a lot cases when people buy debt of bankrupt companies the debt is being bought with an eye towards the equity that will be received upon reorganization, and the analysis is going to be a lot different. This hold's true in Lamperts case with Kmart, by buying the debt he was really buying the stock in the company at a valuation that proved to be very very low. This is because when a company reemerges from bankruptcy the old common stock is usually cancelled and worth zero, and the bondholders receive the stock in the new company.

Say you have a simple example: There is $1,000mm of debt outstanding for a certain company that is now in Ch 11, it's all one class. The plan of reorganization has been approved and states that for every $100 of debt you hold you will receive $40 in cash plus one share of stock in the new company.

If the bonds are hypothetically trading at 60 then that implies a value of 20 for the stock to be received(because the cash is worth par). And if there is $1,000mm outstanding of old debt then the implied valuation of the equity is $200mm. For anyone buying this debt the analysis is going to be totally an analysis of the value of the equity of the company, as the cash is going to be worth face value. So if you think the equity is worth $400mm, then that would make the bonds worth 80 cents and you might buy. But that is the kind of analysis being done.