This book is a rigorous introduction to the art and science of investing in securities issued by companies in financial distress. It consists of four parts: a big-picture overview of the distressed landscape, a discussion of the corporate bankruptcy process, an explanation of the valuation of distressed investments, and several case studies. Co-written by a seasoned practitioner and an academic, the book offers the best of both perspectives.
This specialized tome is a rigorous introduction to the art and science of investing in securities issued by companies in financial distress. Standard fixed-income investing, including investing in high-yield corporate debt securities, is done with the intent of generating a reliable stream of income. The investment, therefore, usually ends when a company enters Chapter 11 bankruptcy protection. For investors in distressed securities, however, Chapter 11 is where the real ballgame begins, according to the book’s authors, well-known value investor Martin J. Whitman and Syracuse University professor Fernando Diz. Distress investing, they argue, is about “understanding contractual and legal rights rather than making macroeconomic forecasts.” The book’s other main theme is that the Chapter 11 process, although imperfect, is “good enough.” Whitman and Diz maintain that Chapter 11 is preferable to legal processes in other countries in terms of balancing the protection of creditor rights and the preservation of value created by companies as going concerns.
Distress Investing: Principles and Technique consists of four parts: a big-picture overview of the distressed landscape, a discussion of the corporate bankruptcy process, an explanation of the valuation of distressed investments, and several case studies, including Kmart and Home Products International. An otherwise excellent text suffers from a few minor blemishes. The writing is a bit dense; readers, especially those completely new to the subject, may at times end up losing the forest for the trees. In addition, the authors occasionally criticize the U.S. government’s actions to support the financial system during the recent credit crisis. Although these opinions are by no means untenable, they tend to be offered without much evidence. A full treatment of the underlying considerations would probably fall outside the scope of the book, but without that background, the authors’ thoughts on government intervention seem out of place. A discussion of the potential long-term impact of the cramdown of senior creditors during the Chrysler and General Motors bankruptcy negotiations would have been helpful, but those events may have occurred after the book was completed. Finally, although Whitman and Diz support their claim that professional fees in bankruptcy cases, especially legal fees, are excessive, their argument loses some of its impact because of frequent repetition.
On the whole, however, Distress Investing is highly suitable for either a business school course or independent study. Co-written by a seasoned practitioner and an academic, it offers the best of both perspectives. The book is comprehensive, touching on nearly all aspects of distress investing. It is practical, up-to-date, and replete with references to the relevant sections of the U.S. Bankruptcy Code.
In the overview section, the authors offer a critique of the efficient market hypothesis that is of interest beyond the realm of distressed securities. They propose that whether a market is efficient depends on the degree of sophistication and the time horizon of its participants, the complexity of the assets traded in the market, and such external factors as the intensity of competition among market participants and the extent of regulation. This framework helps explain why the market for distressed securities is much less efficient than, say, the market for U.S. Treasury securities. The book provides its own best illustration of the authors’ argument.
After reading Whitman and Diz’s wide-ranging discussion of their subject’s many aspects, one cannot help but realize how complex a subject it is. That complexity is what makes the opportunities in troubled companies’ securities both intellectually interesting and potentially lucrative. Financial success ultimately requires experience, but absorbing the contents of Distress Investing is a useful starting point.