Quants in Distressed Debt

rowdyroddypiper · Post by **rowdyroddypiper** » Thu Apr 05, 2012 9:47 am

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).

polysena · Post by **polysena** » Fri Feb 19, 2016 6:09 pm

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.

Kitno · Post by **Kitno** » Sat Apr 30, 2016 3:03 am

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.

Nonius · Post by **Nonius** » Sat Apr 30, 2016 10:57 am

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.

Cheng · Post by **Cheng** » Mon May 02, 2016 1:52 pm

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.

polysena · Post by **polysena** » Mon May 02, 2016 9:20 pm

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.

Nonius · Post by **Nonius** » Mon May 02, 2016 9:24 pm

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.

Nonius · Post by **Nonius** » Mon May 02, 2016 9:30 pm

just read "A Man In Full". class.

Nonius · Post by **Nonius** » Mon May 02, 2016 9:41 pm

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.

henrycliff · Post by **henrycliff** » Tue Mar 12, 2019 6:57 am

great