Distressed Securities: Analyzing and Evaluating Market Potential and Investment Risk

A definitive guide to the market of distressed companies’ debt and equity securities.

In today's volatile business climate, with increasing numbers of bond defaults and Chapter 11 bankruptcy filings, the market for distressed companies' debt and equity securities continues to capture the interest and imagination of the investment, legal, banking and advisory communities. The profit-making potential of securities selling at discount prices makes distressed securities very attractive to the educated and aggressive investor. In this book, the author provides a definitive guide to this market, and applies his considerable analytical ability and practical experience to specific types of distressed securities, including proven strategies for bank debt, defaulted private trade debt, defaulted straight debt securities, and "fallen angels."

Relevant but dated, October 4, 2000
Reviewer: A reader from Berkeley Heights, New Jersey United States (Amazon.com)
Very good empirical material from the early stages of the market. The book is dated though since it has not been updated post the great increase in the size of markets. New classes of distressed corporates (telecoms & possibly future current dotcoms ?), new markets (Japan/Asia), new value extraction methods (CBOs) etc. which have materialised in the past few years need to be addressed as well, both in terms of market developments and further empirical evidence.

Empirical-driven research well-presented, January 28, 2000
Reviewer: A reader from Los Angeles, California (Amazon.com)
A no-nonsense, cut'n dry overview of Mr. Altman's extensive empirical research on the distressed securities market. His statistical procedures and index calculations offer a nice illustrative summary of this niche market, albeit his sample size is quite limited and a handful of his models are rendered inconclusive. However, this book is geared for someone having a keen interest in distressed securities, in particular. Definitely not for someone who wishes to gain an introductory understanding of general finance. Personally, the one deficiency in the book is its dryness.

Edward I. Altman received an M.B.A and a Ph.D. in Finance from the University of California, Los Angeles. Dr. Altman is the Max L. Heine Professor of Finance at the Stern School of Business, New York University. He has an international reputation as an expert on corporate bankruptcy, high yield bonds, distressed debt, and credit risk analysis. He has been visiting Professor abroad and has received several international awards. Dr. Altman is one of the founders and an Executive Editor of the Journal of Banking and Finance, has authored or edited over twenty books, and has written more than one hundred articles for scholarly finance, accounting and economic journals.

	PREFACE	vii

1	Background of the Distressed Securities Market and Summary of Major Findings	1
.	Size of the Market	2
	Supply of Distressed Securities	3
	Distressed Security Investor Profile	4
	Returns on Distressed Securities Investment Strategies	6
	Market Importance and Outlook	8

2.	Supply of Distressed Securities	12
	Bankrupt Companies and Business Failures	12
	Junk Bond Defaults	13
	Distressed Securities by Yield	17
	Publicly Traded Debt Securities	18
	Private Debt	18
	Trade Debt Claims	20
	Conclusion	23

3.	Demand for Distressed Securities	25
	Questionnaire Results	25
	Involuntary Investors	27
	Providers of New Capital-DIP Financing	27

4.	Price Levels and Recovery Rates on Defaulted Securities	31
	Capital Structures	32
	Recovery Rates	32

5.	The Market for Defaulted Private Trade and Bank Debt	37
	Public and Private Debt	38
	Markets for Public Debt	39
	Bankruptcy Rules	39
	Judge Lifland's Court	43
	Proposed Changes to Rule 3001 (e) (2)	44
	Direct Assignments	44
	Participations	47
	Trading Pre-and Post-Petition Bank Debt	47
	Unregistered Securities	48
	Representations and Warranties	49
	Opportunities for Profit	50
	Other Regulation	50
	Heightened Bankruptcy Court Supervision	51
	Functions of the Private Debt Market	52
	Benefits for the Seller	53
	Benefits for the Buyer	54

6.	The Performance of Distressed Securities	55
	Target and Minimum Rates of Return	56
	Historical Performance: Review of Literature	57
	New Test of Distressed Debt Investment Strategies	61
	The Zeta (r) Credit Evaluation Tool	69
	Investing in Distressed Debt Using ZETA (r) Scores	71
	Junk Bond Portfolio Selections	71
	How Can Rigorous Credit Analysis Help?	78
	The ZETA (r) Test	78

7.	An Index of Defaulted Straight Debt Securities	83
	A Defaulted Straight Corporate Debt Index	84
	Market Value Weighting and Return Bias	90
	Size and Returns	90
	Diversification Benefits: Correlation with Other Strategies	91

8.	Fallen Angels: Are They All Created Equal?	93
	Purpose of the Research	95
	Evolutionary vs. Revolutionary Downratings	97
	Some Basic Questions for Investors About Fallen Angels	98
	Prior Studies on Fallen Angels	99
	Empirical Results	101
	Total Return Performance	109
	Credit Deterioration vs. Event-Risk	109
	Pre-Downrating Loss in Wealth	110
	Utilities vs. Non-Utilities	112
	BB vs. B-Rated Downgrades	113
	Relative Performance: Excess Return Analysis	116
	Event-Risk vs. Credit Deterioration	118
	Utilities vs. Non-Utilities	118
	BB vs. B	118
	Downtick Perfomance	121
	Concluding Remarks	121

9.	Default Rates and Fixed Income Performance	123
	Traditional Measures of Default Rates and Losses	125
	Default Rates	126
	Default Losses	126
	Questions Related to the Traditional Method	132
	Mortality/Aging Approaches	133
	Comparison of Results	134
	Aging and Defaults	138
	Returns	140
	Blume and Keim Study	142
	Cheung and Bencivenga Study	145
	Positive Spreads	145
	And Now for the Future	146
	A Different Kind of Simulation	148
	Concluding Remarks	151

10.	Outlook and Conclusion	155
	Supply Forces	155
	Estimating Supply from the Z-Score Bankruptcy Indicator	156
	Z-Score Model Description	157
	Demand Forces	160
	Questionnaire Response on the Outlook	162

	APPENDIXES	173

	INDEX	231