Re: Explain \"buying debt\"
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whats the relative price volatility of corporate debt after a chapter 11 files? i'd think it would rise significantly.
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This depends entirely on the pre-filing capital structure of the entity, and whether in a reorganization, you're above or below the cramdown/pivot security.
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what is a cramdown/pivot security? is that the security that is in between the first lein creditors and the bondholders? probably not since that is a guess outta my ass but i am curious as to how that goes down.
no pun.
thanks,
Barron
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the more senior securities can force the plan of reorg to go through even if the more junior securities are against it. that's called a cram-down. "The Vulture Investors" is a great book that shows how all this goes down.
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To expand on this, in a plan of reorganization, if a senior class of security votes in favor of a plan that gives them an impaired recovery, they can force the more junior securities to accept the plan; this is the cramdown. If you're above the cramdown you are money good (generally), if you're the pivot/cramdown security you generally get equity in the reorganized entity, and if you're below the pivot security you'll be either totally de-equitized or significantly diluted under the reorg plan. Generally, investing in distressed securities tends to have a strong bankruptcy/event/process angle to it, as opposed to the more trading oriented strategies it sounds like you employ.
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