Martin Whitman offers an excellent book that provides both the background and nitty gritty about distress investing. Anyone who has read Whitman’sother books knows that he writes in a very eloquent manner that a casual reader may have trouble understanding. This is especially true in Distress Investing because the topics discussed are quite complex. However, as usual Whitman organizes the book in a manner that makes it a valuable read for a serious investor.
Someone who is very knowledgeable in bankruptcy law has a big advantage reading this book. As I will mention many times in this article one cannot invest in distress securities without knowledge of the current bankruptcy laws. Whitman tries to explain the current laws however without any background in the area it is difficult to grasp.
The book consists of two main parts. The first part of the book discusses the landscape in today’s distress investing world. It discusses the impact that bankruptcy law plays in the investment process. I cannot stress how significant one’s knowledge must be of this area to understand investing in distress securities. Marty Whitman also does a good job explaining the competing players inside and outside of the company who play a big role in whether the creditors get paid,; and whether the company can in a case of chapter 11 bankruptcy, reorganize adequately. Whitman discusses control investors, various secured and unsecured levels of creditors, vendors, professional like bankruptcy lawyers, the court and other various players in the process. He explains how everyone has their own personal interests and how this can play out during the bankruptcy process.
The second part of the book discusses some actual bankruptcies and how they should be analyzed by an investor. Whitman includes two detailed cases; one of a large company Kmart and a small company Home Products International. Whitman details step by step, how he analyzed these investments and went through all the numbers to help the reader understand the investment process in both cases. Whitman does a superb job analyzing the balance sheet and trying to analyze which classes of creditors (secured and unsecured) will be repaid and what percentage of their claim they will receive.
Whitman points out to the reader that large companies and small companies are very different when it comes to distress investing. While it is almost always in the creditors interest for the company to come out of chapter 11 bankruptcy as quickly as possible there is a big difference for small and large companies. A small company’s creditors will almost certainly be wiped out due to lawyers and other professional fees if the bankruptcy process drags out for too long. However, for a large companies creditors this a big concern albeit much less than for a small company’s creditors
There are two good reasons to purchase the book especially now specifically. The first reason is that the information is up to date. As I mentioned in the article bankruptcy law plays a big role in distress investing. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) significantly changed bankruptcy laws in America. The BAPCPA act is discussed numerous times by Marty Whitman and its effect on the creditor and debtor. If this book had been written in 2004 it would be lacking much needed current detail.
The second reason this book is perfect for now is due to the tremendous opportunities in the distress investing area. As I mentioned in a previous article, Third Avenue Funds opened a new credit fund due to opportunities in the credit markets unseen since the early 1990s. According to their recent newsletter the Third Avenue Focused Credit Fund invests in debt-equity restructuring cases, distressed performing credits, cases of debtor in possession, stressed performing credits which mature shortly, and performing loans or bonds with low risks of defaults. Many of these situations are discussed in the book.
Whitman ends off the book with the pros and cons of our bankruptcy system. He says that while our system is not perfect no system is and America’s current system is overall quite satisfactory.. Whitman notes that many countries including Canada, Great Britain and China have been going the roué of the US in their respective bankruptcy laws. However, Marty Whitman does offer some suggestions for improving the current system in the US. Some of these suggestions include encouraging creditors to help reorganize a viable company and not just get their cash, and amend mark to market where appropriate to better reflect the true economics of the business.
To purchase the book on Amazon.com click on the following linkDistress Investing
Disclosure: New FTC guidelines require me to disclose I have a material connection because I received a free copy of the book to review.