Distressed Debt Investing

FCXoptions

FCXoptions

http://www.bloomberg.com/news/artic...ack-bonds-after-prices-hit-lows-on-downgrades

I was just reading through this article on Noble and it brought me back to something I had thought about in the past, but to be honest hadn't thought about again until reading this article. Distressed debt investing.

Do any of you all do this and if so how has your experience been with it? I've never touched a bond before to be honest, but definitely find this whole area very interesting and would like to learn more on it.
 
newwurldmn said:
It was always my view that if you can make money on distressed debt, most times you can make more money on the stock.
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True, with the stock I would say in a lot of situations you should be able to make more. But of course more risk with that as well, so I guess just depends. In the case of Noble (just for this example) it looks like the better play might be in the bonds though, based on the prices quoted in the article I linked to. Noble would have to get near its all time highs to make a better return I believe.

But in most situations I would assume the stock might be the better route for much larger gains.
 
Another resource I'd like to mention is http://finra-markets.morningstar.com/BondCenter/Default.jsp , which lets you search for bonds by company name or stock symbol and will show you the last reported trade price, although I believe that reporting the trades to that site is completely optional. I think that that URL has changed in the past, so, in case anyone reads this article years after I write it, I'll also mention that you can eventually find that link by navigating around finra.org.

I vaguely recall that that FINRA search page uses a bond naming system that is not CUSIP, but I think you can get the CUSIP ID's from it, which I think you need if you want to place an order at Interactive Brokers or TD Ameritrade.

I have never actually traded any distressed debt instrument and am not any kind of financial or legal professional or expert, but, just to convey my perhaps incorrect understanding of the opportunity, I'll mention that I recall from one of those blog articles on distressed-debt-investing.com that, when a bankruptcy petition is filed, there is often a "big puke" of institutions dumping the bonds at fire sale prices just as a matter of policy. I tried following such events a few times, observing reported bond sales on the FINRA site on such occasions for maybe 40 cents on the dollar go up to perhaps 65 cents on the dollar a few days later, perhaps once some longer term investors made a better estimation of what the recovery value for the particular bonds in question was likely to be and started buying from the short term liquidity providers. So, I imagine it could be quite profitable for someone who is willing to do enough homework.
 
toonerdy said:
I have never actually traded any distressed debt instrument and am not any kind of financial or legal professional or expert, but, just to convey my perhaps incorrect understanding of the opportunity, I'll mention that I recall from one of those blog articles on distressed-debt-investing.com that, when a bankruptcy petition is filed, there is often a "big puke" of institutions dumping the bonds at fire sale prices just as a matter of policy. I tried following such events a few times, observing reported bond sales on the FINRA site on such occasions for maybe 40 cents on the dollar go up to perhaps 65 cents on the dollar a few days later, perhaps once some longer term investors made a better estimation of what the recovery value for the particular bonds in question was likely to be and started buying from the short term liquidity providers. So, I imagine it could be quite profitable for someone who is willing to do enough homework.
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Yeah I think there is definitely some potential with it. It comes down to doing a lot of homework and figuring out whether or not they can survive without bankruptcy before the maturity date! :wtf:
 
FCXoptions said:
[...] It comes down to doing a lot of homework and figuring out whether or not they can survive without bankruptcy before the maturity date! :wtf:
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If you were to trade the bonds in such a situation, I would think you would still want to have some estimation of what the holders of that particular type of bond would receive if the bankruptcy does happen. In situations where you think that is zero and you're just betting that the bankruptcy will be avoided, then I would expect that you would want to trade the stock, as newwurldmn mentioned, since the stock would likely go up in value more than the bonds would.
 
toonerdy said:
If you were to trade the bonds in such a situation, I would think you would still want to have some estimation of what the holders of that particular type of bond would receive if the bankruptcy does happen. In situations where you think that is zero and you're just betting that the bankruptcy will be avoided, then I would expect that you would want to trade the stock, as newwurldmn mentioned, since the stock would likely go up in value more than the bonds would.
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Ah sorry, by homework I meant figuring up what you could reasonably expect to get back in the event of a bankruptcy. But you are right on the stock value
 
You also need to take into account that the many of the buyers of the distressed debt are hedge funds that specialize in taking a very active part in any bankruptcy proceedings that occur which may allow them to get a much greater payoff on their defaulted debt than their tranche would normally rate. Lots of games they play, for example by threatening to drag the proceedings out, which kills any remaining chance of a reorg, the senior debt holders may give them more than they otherwise would so they don't take a complete loss on their own tranche. All the machinations aren't important, but what is important is that these hedge funds can value distressed debt higher than you can. As a result, I'd say you're getting lower risk adjusted returns than you should if you invest here.
 
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