Why Distressed Debt Is the Greatest Thing Since Sliced
Bread
Wharton 3/27/2013
Staying Power
• In 20 years, what is most likely to be around?
– Facebook?
– Google?
– Bankruptcy?
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Why Do Companies File?
• Companies file for bankruptcy for three reasons:
– They have run out of liquidity
– They will soon run out of liquidity
– They will eventually run out of liquidity
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Distressed Debt Analysis = A Puzzle
• Analysis of bankruptcies is really a study of three things
– Rational Actors’ Assessment
– Sources of Value
– Value Leakages
• Despite the complexity, you are working with MORE perfect information in distressed
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A Very Hard Puzzle
• If it was easy, everyone would do it:– Voluminous documentation (credit
agreements, indentures, plans, SOFAs, etc.)
– Org charts and capital structures (who has first right to what)
– Guarantees, security, pledges, etc.
• While everyone is focused on exit multiples, spend time looking for opportunities and pitfalls of value creation
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Rational Actors’ Assessment *
• Analysis of bankruptcies is also study of people and their motives:
– Maxim #1: People, especially management teams, want to get rich
– Maxim #2: The bankruptcy code grants significant power to management teams
* Peter Lupoff, Founder of Tiburon Capital Management and my former boss coined the phrase
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Overseas Shipping Group (“OSG”)
• Global leader in energy transportation
• Crude, U.S. flag operations
• Filed for BK in November 2012
• What are analysts focused on?– Exit multiple
– U.S. flag divestiture
– Tax claim
• Holdco Debtor: “Overseas ShipholdingGroup, Inc.”
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Quick Detour: SOFAs
• Statement of Financial Affairs
• Schedule of Assets and Liabilities for a single Debtor on a non-consolidated basis
– Real property/assets
– Creditors holding secured claims
– Creditors holding unsecured claims
– Executory contracts / leases
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Overseas Shipping Group
• Between 2/26/2013 and 2/27/2013 OSG filed docket items 553-922 (Over 350 items): All SOFAs and Schedules of Assets/Liabilities
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Corporate Structure
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Capital Structure Consideration
• Bonds structurally subordinated to bank facilities for any value at subsidiaries
• Bonds essentially pari with bank debt for all value at holdco (cash, JV equity)
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Bond Pricing
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Overseas ST Holding LLC
• Subsidiary of OSG Bulk Ships, Inc. (“OBS”)
• Assets: ~$340M
– $96M Interco Receivable
– $245M of Vessels
• Liabilities: ~$160M
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Overseas ST Holding LLC -Liabilities
• Listed in the $160M of liabilities at Overseas ST Holding LLC was a very curious entry:
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Interco Liability = Asset for Holdco
• Creditors of OSG ST Holding LLC should recover par (huge overcollaterization)
• Therefore, Overseas Shipholding Group, Inc. creditors just recovered an extra ~$115M
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Conclusion
• The more complicated the case, the more opportunities to uncover:
– Hidden gems of value
– Hidden sources of value destruction / leakage
• More importantly, the more complicated the case, the less likely analysts are looking at it, especially in smaller situations -> Alpha.
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