OVERVIEW

The period from 1999 to 2002 witnessed an unprecedented number of corporate bankruptcies in the United States. A total of approximately 439 firms with assets greater than $100 million filed for bankruptcy during this period. For at least 13 of these firms, it was their second visit to bankruptcy court. For six firms, it was actually their third visit. ^[1] Fortunately, there appears to be an informal "three strikes and you're out" rule, as each of the so-called chapter 33s appears destined to be liquidated and put out of its misery. The total amount of debt and claims involved in the insolvencies over this period is difficult to precisely estimate, but easily exceeds $400 billion. ^[2]

For most investors and investment managers, this was a period of significant financial loss. For many investors, however, it was also a period of substantial opportunity. Prescient investors made money "shorting" securities, including debt securities they expected to fall in value. Still others made superior investment returns, adroitly investing in securities of companies in, or at risk of filing for, bankruptcy.

The purpose of this book is to provide the insight and skills necessary to invest successfully in the securities of financially distressed companies. First, we should discuss the subject matter. What is meant by distressed debt and why does it potentially represent an attractive investment? It sounds about as counterintuitive as wanting to invest in "junk bonds," and not surprisingly, the concepts are related. What often surprises many noninvestment professionals is...