Managing a Distressed Debt Portfolio

I am amazed of some of the resources you can find out there if you know how to massage the Google Search. I was running a search on distressed debt portfolio management (for all you followers out there, the exact search was: "Distressed Debt Portfolio" filetype: pdf). What I found was a fascinating PDF entitled: "Risk Management for a Distressed Securities Portfolio" by Marti Murray. This is a great read for any distressed investor.

You can find the document here: Risk Management for a Distressed Securities Portfolio

This is a must read document for those interesting in distressed debt securities. One of the case studies is on the Worldcom/MCI Bankruptcy, which is a spectacular example of a complex bankruptcy where risk adjusted returns were there for those who did LOTS of digging.

Murray points out one of the keys of distressed debt analysis and bankruptcy investing is to determine the key drivers that will make or break an investment. Sometimes it is two or three variables, and sometimes it is significantly more. As a topical example, the bank debt of General Motors has been on a tear as of late (the revolver is 92, the term loan is 95 - both up 40-50 points from the lows). The two main drivers of that analysis were:

1. Is the security granted for either the revolver or the term loan (they are different) greater than the amount of debt outstanding. Most market participants agreed that that was indeed the case.
2. How much will the government crush you? That is where the discrepancy and the mismatch of price vs intrinsic value really came down to.
   

We are beginning to see that the government (unlike in the Chrysler bankruptcy) is going to play ball with the secured lenders at GM. (As an aside: if any lawyers can explain why the differentiation, leave a comment). So the bank debt rallies in response.

Stay tuned in the coming weeks for some interesting feature (more case studies, interviews, more profiles of distressed debt fund managers) we have been cooking up at Distressed Debt Investing.