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Wilbur Ross distressed investing


augustabound
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I just read a post at distressed debt investing about value traps and one of Wilbur Ross' strategies. 

http://www.distressed-debt-investing.com/2011/09/on-value-traps.html

 

The part I was intrigued by was this part,

Wilbur Ross is one of my favorite investors. Here is the formula:

Determine an industry that has staying power (i.e. will be around in 20 years) that is under severe stress

Purchase the senior bonds of a company in that industry at distressed levels

File the company, and convert your senior ownership to a majority equity share

Clean up operations

Wait

 

My question to this board is, what if any, is this a transferable strategy to individual investors (minus the controlling interest part obviously  :) )? 

I like looking at the contrarian angles, so finding an industry at a low point whether cyclical low or the one time fixable type is usually the easy part..........usually. 

Or is the most sensible course for an individual investor to find the best of breed in a distressed industry and buy the common shares knowing you may need years for it to turn in your favour (like some peoples thesis on USG)?  I know I read and heard from friends during the downturn in '08-'09 who bought distressed bonds and preferreds, but when comparing some of them to the common they either lagged the common or were comparable in the rebound.

 

 

 

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Wilbur Ross on Dealmakers Summit  on Sept. 27

http://www.bloomberg.com/video/76206552/

 

 

Determine an industry that has staying power

It is the same as value investing principle. Investing only in your circle of competency is the way to determine what business has the staying power or what not .

 

My question to this board is, what if any, is this a transferable strategy to individual investors (minus the controlling interest part obviously  :) )? 

Yes,it is. Buying when the crowd are pessimistic and the price of equities are depressed. But you have to make sure that the company has staying power in both their business model and balance sheet (and not a fraud to add to these days financial market) .  In case of Wilbur, he has a lot of capital to inject to the company .So he can invest in the company that even has a mediocre balance sheet. That is his advantage against the average Joe.

 

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Determine an industry that has staying power

 

It is the same as value investing principle. Investing only in your circle of competency is the way to determine what business has the staying power or what not .

 

 

I think that's a good point.

 

My gut told me that his style would be only suitable for him and not necessarily suitable for a smaller individual. 

 

I think I may have answered my  own question in the O.P. with regards to the '08-09 downturn and friends investing in bonds and pref instead of common shares that had similar upside.

 

Just sounding ideas on a boring, rainy Thursday morning.  :)

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  • 3 years later...

Distressed investing is a fascinating area but it seems like a difficult strategy for an individual / retail investor to really exploit. Most distressed debt investors buy senior secured debt which is the highest security in the capital structure. In most cases, these are bank loans and due to their seniority allow the investor to control / influence the restructuring or liquidation. Unfortunately as an individual investor, its difficult if not impossible to purchase bank debt in the secondary market. As such, the only option is to buy bonds or debentures which are typical second lien or unsecured. Being lower in the capital structure means you have to be more precise with your recovery analysis and of coarse anything related to distressed investing requires a good understanding of the legal aspects of bankruptcy.

 

With that said, it would be great to get a discussion on this subject going here. It would be very useful to hear people's experience with distressed investing as a individual / retail investor.

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Distressed investing is a fascinating area but it seems like a difficult strategy for an individual / retail investor to really exploit. Most distressed debt investors buy senior secured debt which is the highest security in the capital structure. In most cases, these are bank loans and due to their seniority allow the investor to control / influence the restructuring or liquidation. Unfortunately as an individual investor, its difficult if not impossible to purchase bank debt in the secondary market. As such, the only option is to buy bonds or debentures which are typical second lien or unsecured. Being lower in the capital structure means you have to be more precise with your recovery analysis and of coarse anything related to distressed investing requires a good understanding of the legal aspects of bankruptcy.

 

With that said, it would be great to get a discussion on this subject going here. It would be very useful to hear people's experience with distressed investing as a individual / retail investor.

 

Oaktree.

;)

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