Distressed Debt Analysis FW

2 min readFeb 24, 2021

Distressed Debt Analysis Framework

Summary 1

1) Value the Assets

2) Map Liabilities

3) Waterfall

a. Fulcrum / creation multiple

4) Best Risk Adj. Return

5) Risks to thesis / hedges

“Bonds trade at X, I see Ch11 recovery as Y, or upside in refi of Z. X implies 50/50% probability

Summary 2

2, 3, and 4 all done through lens of scenario (a) and (b)

1) Value the Assets

a. EV if sold / reorg in Ch11 (risk adj. multiple based)

b. Hard Assets in Ch7 Liquidation

i. Cash offset by $40m Ch7 Trustee fees, $50m+ Advisory Fees and $30m retention costs

ii. PPE at 60c

iii. Receivables at 80c

iv. IP

c. Creation Multiple (Market Value of Debt / EBITDA)

2) Liabilities:

a. Org Chart

b. Term structure

3) Waterfall & Recoveries (asset coverage xLev and LTV)

4) Where is best risk adj. returns:

a. Trees (Refi & Ch11 / Ch7)

b. Extracting Value (Carveout, low creation multiple, DIP)

Extended / Considerations

1) Justify EBITDA multiple by:

a. Impact of Rx (greater discount for government / Critical B2B vs. Consumer)

b. Cyclicality / Growth

c. Diversification

2) Cap table with Lev Thru and Asset Coverage (at Ch11 and at Ch7)

3) Waterfall:

a. Term structure if no Ch11 à if you want to buy the fulcrum, wait until you reach Ch11 as price will fall

b. Consider structural subordination / substantial consolidation / preferential transfers / fraudulent conveyance

c. Consider trade claims and preferential creditors

4) Recoveries & Pricing

a. Scenario Trees

b. Liquidity / unencumbered asset base for DIP Financing

i. Can be funded by 363 Sales

Written by Fahad Masood