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How to analyze distressed corporate bonds?


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There's very few true "private placement" anymore these days.  Most 144A issuers are required to file financials even if they don't have publicly traded stocks outstanding.  So you get financials all the same.  If you look at bank debt, you can chose to be on the "private" side, and receive additional information, mostly compliance to bank covenants as well as company projections. 


Outside of financial information, the document to focus on is the indenture for bonds, and credit agreements for loans.  And you read it for each class of creditors carefully.  If you can't get the indenture, the OM's are supposed to describe the relevant terms, even though they may not contain 100% of the information you want.  Especially for distressed debt, one needs to understand all the intercreditor issues, for example, when can a certain class of creditors call an event of default, how can such default be cured, what are the grace period, etc.  Every circumstance is different.  You need to have a feel for how is a default likely to be resolved coming out of a bankruptcy proceeding.  You may think buying a HY bond at a steep discount is cheap on an enterprise value /going concern basis, when the bank agreement may allow another class of debt senior to you foreclose on the asset, sell it for whatever they think it's worth, and wipe you out in a distressed sale, except maybe you have a cure by putting in a bit more money in the company to resolve a technical default on a senior lender persuant to the legal agreements.  If you don't have that kind of money, maybe the other guys in the same class of debt as you will do it to avoid losing the asset to somebody else, so you get to ride along their action.  It's all about understanding all those relationship, understandign the ownership base, and taking educated guesses on what those ownership base may or may not do, what a bankruptcy judge is likely to approve in a plan of reorganization, and the associated valuation implications. 

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