Explain "buying debt"

[DespotInExile]

This is obviously a reference to buying Kmart bonds that are trading in the market at 20 cents on the dollar. This is clearly not a reference to trade debt, as somebody suggested, since that stuff doesnt trade easily.

[DespotInExile]

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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.

[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.

[DcifrThs]

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whats the relative price volatility of corporate debt after a chapter 11 files? i'd think it would rise significantly.

[/ QUOTE ]

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.

[/ QUOTE ]

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

[hawk59]

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[ QUOTE ]
[ QUOTE ]
whats the relative price volatility of corporate debt after a chapter 11 files? i'd think it would rise significantly.

[/ QUOTE ]

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.

[/ QUOTE ]

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.

[DespotInExile]

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[ QUOTE ]
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[ QUOTE ]
whats the relative price volatility of corporate debt after a chapter 11 files? i'd think it would rise significantly.

[/ QUOTE ]

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.

[/ QUOTE ]

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

[/ QUOTE ]

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.

[/ QUOTE ]

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.

[prohornblower]

Andy Beal (the banker) made a chunk of his money buying debt. I forget from whom. IIRC, he bought it for like 10-20 cents on the dollar. 40 does seem really high, as another poster stated.

[livinitup0]

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The guy in question is renowned investor Eddie Lampert. He came out pretty well on this "ripoff"

http://money.cnn.com/2006/02/03/news...pert/index.htm

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If this was retail Kmart credit extensions via credit cards or instore credit then yeah 40% is a joke and this isnt true....however after reading more of the posts, I take it this is a bit different than the OP described?

I had assumed by the way I read the OP he was referring to commercial debt of their credit departments. If this was something more like corporate liens changings hands or higher end protfolios then I can see that. I havent read any of the linked pages but I assume he had some sort of an established financial investment or risk management company?

Its an interesting industry to say the least....but there's a lot of red tape and lawyers the farther away you get from retail debt acquisition.

[Sniper]

liv, why don't you just read the article [img]/images/graemlins/wink.gif[/img]

[Brainwalter]

[ QUOTE ]
Andy Beal (the banker) made a chunk of his money buying debt. I forget from whom. IIRC, he bought it for like 10-20 cents on the dollar. 40 does seem really high, as another poster stated.

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Gramma made some money this way too.