Like most things in business, the devil is in the detail. This overused phrase should have been the subtitle to this chapter. Being an effective distressed debt investor requires strong analytical skills, but also good time management, thoroughness, an appreciation for the most significant legal issues, and finesse. With all the opportunities that will typically present themselves during a promising market phase, an investor should develop screening criteria, which can be used to help identify those situations most suitable for that investor. Those criteria will be different for each investor, and contrarians may find that the most opportunity for misvaluation is in situations that traditional metrics are likely to reject. However, since time and market pressures are always factors, it is also necessary to develop the ability to quickly assess the return potential in any particular situation.

Once a situation passes an investor's preliminary screens or tests, the challenging, and sometimes tedious, work of making sure that all of the pertinent risks have been identified and properly factored into the investment decision calculus begins. This is the role of due diligence, which has both financial and legal components. On the financial side, obtaining company and industry performance information, developing a detailed valuation, and considering how that valuation may be affected by different reorganization scenarios are essential. On the legal side, the rights afforded by the terms of the security under consideration must be thoroughly understood to confirm some of the basic premises of the valuation. In addition, where bankruptcy...