Get the strong impression that you're coming at this from an equity investing point of view. Distressed debt is not distressed equity. You should not really give a toss about how a deal with Comcast will let Xfinity subscribers watch the MLB or whatever (unless you're hoping the debt will be converted to equity that you plan to hold thereafter?). What matters to you is that recovery number. The market has decided that it doesn't believe the 3-4%, and it thinks 2% is more likely. You need to decide, based on the capital structure and an informed valuation of the assets, whether you think the market is wrong. If that sounds like too much bother, you shouldn't be investing in distressed debt.
Yeah, that's not how distressed debt works. You need to review court documents and recoveries (which includes the equity value of the company) which is now valued from 600 million to a billion (down a lot from when they first filed their plan). Most unsecured debt in bankruptcy doesn't get cash recovery, but an equity stake in the company. Unfortunately, due to lower cash flow than they initially predicted and time, the equity is going to be worth a lot less than when I wrote this article. They got a worse comcast deal (that was a major cash flow for them), had Amazon pull out of a major equity investment, weren't able to get there with their contracts full renegotiated, and had a pound of flesh taken out of them by their DIP lenders. Their new plan is a toggle which means they may not even reorganize at all. Nature of distressed debt investing is often you can get 50% to 75% losses the same way you can get a 50X like in Hertz and some of the recent Crypto bankruptcies.
Are any of those negative developments really a surprise? A company in bankruptcy is obviously going to have the lower hand in contract negotiation. Believing the company's recovery estimation is akin to believing a used car salesman on the mileage. The yield of 2% reflected that. What you were missing was an edge - any reason to think the 2% reflected you knowing something the market didn't, rather than vice versa.
Get the strong impression that you're coming at this from an equity investing point of view. Distressed debt is not distressed equity. You should not really give a toss about how a deal with Comcast will let Xfinity subscribers watch the MLB or whatever (unless you're hoping the debt will be converted to equity that you plan to hold thereafter?). What matters to you is that recovery number. The market has decided that it doesn't believe the 3-4%, and it thinks 2% is more likely. You need to decide, based on the capital structure and an informed valuation of the assets, whether you think the market is wrong. If that sounds like too much bother, you shouldn't be investing in distressed debt.
Yeah, that's not how distressed debt works. You need to review court documents and recoveries (which includes the equity value of the company) which is now valued from 600 million to a billion (down a lot from when they first filed their plan). Most unsecured debt in bankruptcy doesn't get cash recovery, but an equity stake in the company. Unfortunately, due to lower cash flow than they initially predicted and time, the equity is going to be worth a lot less than when I wrote this article. They got a worse comcast deal (that was a major cash flow for them), had Amazon pull out of a major equity investment, weren't able to get there with their contracts full renegotiated, and had a pound of flesh taken out of them by their DIP lenders. Their new plan is a toggle which means they may not even reorganize at all. Nature of distressed debt investing is often you can get 50% to 75% losses the same way you can get a 50X like in Hertz and some of the recent Crypto bankruptcies.
Are any of those negative developments really a surprise? A company in bankruptcy is obviously going to have the lower hand in contract negotiation. Believing the company's recovery estimation is akin to believing a used car salesman on the mileage. The yield of 2% reflected that. What you were missing was an edge - any reason to think the 2% reflected you knowing something the market didn't, rather than vice versa.