Distressed Debt on the Menu — The Vulture Taco: Buying Trouble at a Discount

Taco Tuesday #16

One hundred dollars. Do I hear eighty? Sixty, forty, thirty… sold. A bond once valued at $100 just sold for $30. Did somebody uncover $70 of hidden value, or pay $30 for something headed toward zero?

The answer is not hiding inside the coupon. It is somewhere inside the wreckage.

In this Taco Tuesday episode of the Unbearably Bullish Podcast, Donald Johns introduces the Taco Vulture and walks through how distressed debt works, who gets paid when a company can't pay everyone, and why the discount is not the same thing as the recovery.

In This Episode

• What makes debt "distressed": missed payments, restructurings, bankruptcy and asset sales
• The shell: purchase price vs. face value vs. recovery value
• The protein: enterprise value, and a broken balance sheet vs. a broken business model
• The cheese: collateral, and why "secured" doesn't guarantee full repayment
• The salsa: cash flow and liquidity, because time consumes cash
• The hot sauce: liens, guarantees, covenants and intercreditor agreements
• Who gets paid first in a restructuring, and how Chapter 11 classes work
• The fulcrum security: where the company's value runs out
• Three hypothetical recovery outcomes for a $30 bond
• The Vulture's five-point inspection: value, business, legal position, time, recovery
• Hot Sauce or Hazard: six distressed-debt myths
• The Bull's case, 🐻 the Bear's case and 🦅 the Vulture's view
• This week's Taco Tuesday Challenge: build a one-page recovery menu

Cheap describes the price. Undervalued requires analysis.

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• Bull, bear or vulture: is distressed debt a misunderstood opportunity, or a category where investors routinely underestimate the danger? Tell us in the comments