Forums  > General  > Quants in Distressed Debt  
     
Page 1 of 1
Display using:  

JM


Total Posts: 40
Joined: Apr 2010
 
Posted: 2012-03-07 15:40

My firm is looking to shift into multi-strategy areas such as distressed debt.

I have limited experience with it.  What can/do quants contribute in the space? 


Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2012-03-07 18:53
In distressed basically nothing.

Distressed debt is all about analyzing companies from a fundamental point of view. You have to read loads of balance sheets and annual reports, put all figures in a "model" (maybe with some reasonable adjustments) and make a judgement call whether the company is worth what you see quoted or not (or what the break-up value is).

Experience is a big plus here...

"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"

cpptrader


Total Posts: 86
Joined: Feb 2007
 
Posted: 2012-03-07 19:17
^^exactly.

On the transactional side, a lot of it is negotiation, and using numbers that are "easy to follow and explain". A lot like M&A, different largely because things aren't as rosy - more issues abound. Those issues are usually balance sheet or forecast related. Generally I've found simplicity to outweigh accuracy, and more generally rounding is popular.

There was some work done mathematically as it pertains to convertibles, risk of default, etc., although I'm not sure if anyone in practice really uses that. I think the most complex math I've seen is black scholes on dilutive warrants...

Kind of a "sky is blue" post, but since you asked, hope it helps.

sidml


Total Posts: 39
Joined: Sep 2009
 
Posted: 2012-03-07 19:56
If you can find a strategy that works, good for you. Do share with us.

Some issues:
1. OTC: traded entirely OTC by appointment at a few market makers. Bid-ask spreads are quite wide. You'll rarely get broker runs with reliable pricing for quant modelling.
2. Legal risk: significant portion of the analysis is understanding the claims of each security and where the assets reside.
3. Transactional process: value creation also frequently depends on negotiations among the different classes of creditors, hence hard to model.

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2012-03-07 20:19
And because I saw it recently:

4. Read the docs. Read the f*cking docs !!

A trader bought a loan some time ago. It took the agent 6 months to figure out that the trader wasn't allowed to buy the loan... I think this can only happen in distressed.

"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"

doctorwes


Total Posts: 577
Joined: May 2005
 
Posted: 2012-03-08 00:09
Chapter 12 of Seth Klarman's book is a good introduction to investing in distressed securities, though it's a bit dated now, and of course he can't get into many details in just twenty pages.

My impression is that it's tough to pull it off successfully as a passive investor. You have to be prepared to get involved in the creditors' committee to work towards a good outcome, and that requires lots of experience and lots of time. Otherwise, you're free-riding off others' efforts there, and you have to trust that they won't screw it up.



JM


Total Posts: 40
Joined: Apr 2010
 
Posted: 2012-03-08 16:23

Thanks all for the help.  

When the downside is evident and the upside is unlikely and asymmetric there's not much point in hedging a portfolio of distressed debt against macro risk.  From the case studies I'm reviewing, it looks like needed risk management is dominated by very specific enterprise and legal issues.  Cap structure collapses under some DIP-type subordination and rules out opening lines like relative value. 


balrog


Total Posts: 259
Joined: Jun 2004
 
Posted: 2012-03-12 15:26
You don't tend to see many quants in distressed / special sits. In terms of risk management, typically you're trying to isolate the risk you're making a bet on, be it credit quality or recovery rates on npls etc. So you will tend to try to hedge out any currency or interest rate risk on your trade / investment.

In theory you could apply quant techniques to assess for example likelihood the equity kickers on a special sits loan will be in the money given historical share price performance assuming your loan works and company restructures - you're basically supplying a structured product as investment to the investee company and thus should be able to embedd lots of fees and optionality to into the structure. I think a quant could be quite useful in such circumstances. Anything where there are reference asset prices which will directly influence the chance of a distressed trade / special sits investment working out, sure some angles a quant could look at to enhance the risk / reward assessment at time of pulling the trigger.

Also for any NPLs where you have highly granular portfolios such as resi mortgages, car loans, personal loans etc, you can apply quant / statistical techniques based on historical portfolio perfomance to determine pricing, to some degree. This is the only place apart from risk management I've seen any quants working in distressed.

deeds


Total Posts: 425
Joined: Dec 2008
 
Posted: 2012-03-14 13:08

I've looked at a number of these investments from a range of fund managers in the course of my work over the last couple of months.

I agree with what's been written here...

- most risks are idiosyncratic, and holders of investments are very active in trying to affect outcomes.  These factors seem to move an analysis away from standard quantitative finance assumptions.

- statistical techniques can be used for claims based on aggregated securities.

Two speculative thoughts -

- I wonder if there is any mileage in applying game theory in restructuring or other outcomes requiring negotiation in the context of constraints?

- Quantitative macro analysis may be of some use in understanding structural forces which could affect outcomes.


cpptrader


Total Posts: 86
Joined: Feb 2007
 
Posted: 2012-03-14 16:42
- I wonder if there is any mileage in applying game theory in restructuring or other outcomes requiring negotiation in the context of constraints?

In the context of corporate restructuring, I think game theory is in place on at least an informal basis, with a bias towards zero-sum outcomes. In very distressed scenarios, you can run into a traditional prisoners dilemma, where seemingly coordinated bad decisions will just sink an asset leaving the debt otm.

Let me think about the concept more. Negotiation is effectively the entire mechanism on a single situation basis, supplemented by bankruptcy process where applicable. Where is your speculation leading you?


rowdyroddypiper
NP Wrestling Champion

Total Posts: 1181
Joined: Apr 2004
 
Posted: 2012-04-05 09:47
I think to the extent someone with a quantitative background is a good problem solver, a diligent researcher and able to learn on the fly they could be useful. Where I think someone will get their lunch eaten is all the stubbing your toes you do on actually working through deals. It's a pretty specialized area for a reason, it's a complete pain in the ass. And it's all negotiation, so if you don't have a background in it (reading a Trump book doesn't count) it can be exhausting.

To be honest, if you have capital to deploy you can probably hook up with a guy or two that has experience in the space and do a drop in to your shop. That way you get the benefit of their experience but still maintain final decision making authority. If I were an investor I'd be a little nervous with a manager just kind of trying to figure it out. If you're serious drop me a line as I might have a few recs for suitable guys (depending space you are looking at).


Revolution to the mean

polysena


Total Posts: 1064
Joined: Nov 2007
 
Posted: 2016-02-19 18:09
Reviving this thread because of no better match.

Buy and sell distressed bonds
I would like to understand what the distressed bond strategy amounts to is this a bet on "recovery" at the end? How do you differentiate market risk (ie price risk) and credit risk here does this question even make sense?

Distress bonds can migrate upwards or downwards apparently. Pricing entails however probably different views on Fundamentals and basically recoveries no?

Links to interesting reads are welcome ... Poly.

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода")

Kitno


Total Posts: 373
Joined: Mar 2005
 
Posted: 2016-04-30 03:03
Polysena, applying quant principals to distressed debt trading is akin to trying to apply quant techniques to M&A.

I am however a big fan of applying quant techniques to cash credit. The problem is that few have access to the necessary data to allow analysis and we are stymied by depth execution problems in the cash credit market.

"Yeh, after that blow out I bid the bonds at 76 and you hit man...You're 77/81 now? Cool man...What? Do I care at 80? No mate... I'm 73 bid now...I'm sure you didn't just load up just for me...".

Nonius
Founding Member
Nonius Unbound
Total Posts: 12778
Joined: Mar 2004
 
Posted: 2016-04-30 10:57
The distressed debt shops I've seen tend to be populated with guys with Law, credit and/or workout backgrounds. Some do the credit analysis and think a company will pull through, whereas some others just want to have the debt to eventually own the assets. Saw it in Asia a lot- one shop based in HK in particular.

Chiral is Tyler Durden

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2016-05-02 13:52
I would like to understand what the distressed bond strategy amounts to is this a bet on "recovery" at the end?

Depends. Either recovery or liquidation. In the first case you bet that either your assets become worth more or you gain (more) control. Think distressed exchange of secured bonds for equity for example. Liquidation would mean that you can access the underlying collateral and sell it or maybe break up the company and sell it piecewise.

How do you differentiate market risk (ie price risk) and credit risk here does this question even make sense?

Price risk shouldn't be that much of an issue. The question is rather how many cents on the dollar you receive, either if things turn positive again or if you liquidate the company.

Re literature: you can read Howard Mark's musings, either the book or his memos at Whitman: The Aggressive Conservative Investor.

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

polysena


Total Posts: 1064
Joined: Nov 2007
 
Posted: 2016-05-02 21:20
Dear Cheng,
You have perfectly well understood the sense of my two questions and the answers are very helpful. Many thanks.
Kitno & Nonius. Thank you as well, I was not trying to apply "quant" techniques but just understand the "intent (ie what people are after when they do that) " of strategies around distressed bonds. I had not been able to decode all your sentences my English is poor, sorry.
Poly.

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода")

Nonius
Founding Member
Nonius Unbound
Total Posts: 12778
Joined: Mar 2004
 
Posted: 2016-05-02 21:24
Poly, I'll be more terse. Distressed Debt is not a good space for mathematics. It is a space about words, contracts, legal mumbo jumbo, the ability to put the kibosh on some motherfuckers who are up shit creek without a paddle. that ain't math. it is valuable, but it ain't math. Personally, I think a good experience in one of the 5 crime families in NY would be a good training for Distressed Debt.

oh, maybe that was less terse, but clearer.

Chiral is Tyler Durden

Nonius
Founding Member
Nonius Unbound
Total Posts: 12778
Joined: Mar 2004
 
Posted: 2016-05-02 21:30
just read "A Man In Full". class.

Chiral is Tyler Durden

Nonius
Founding Member
Nonius Unbound
Total Posts: 12778
Joined: Mar 2004
 
Posted: 2016-05-02 21:41
There was a character in that book called "The Workout Artist". About the time I read the book, I befriended this sort of older streetwise guy at the bank in which I was employed in NY who was the North American "workout artist" for the bank....we'd knock back a few cocktails from time to time. went for some fine Indian food in midtown one fine day. some mofo who owed the bank something like 10Mn was at the same restaurant....the way my WorkOut Artist friend went up to him with a smile, patting his back and shit, with a subtle wink, asking him how the wife and kids are, etc etc, like Hollywood. and then we walked out of the restaurant, cracked me up. it was pure nuanced Wiseguy. the guy who owed the money looked very scared.

Chiral is Tyler Durden

henrycliff
Banned

Total Posts: 3
Joined: Mar 2019
 
Posted: 2019-03-12 06:57
great
Previous Thread :: Next Thread 
Page 1 of 1