Our distressed debt selection process
After our initial daily screening of global bond issues for yields and maturities:
- We review the issuer’s most recent quarter and year end financials and its relative performance to the industry segment it’s within for any signs or indications that their financial woes may have changed course.
- If issuers show multiple signs of a turnaround (most do not, as they simply are just waiting for the climate that affected them to improve), we mark only the top 25% of them for further review.
- In more intensive review, we compare the debt load to revenues, income, gross profits, cash flow, cash on hand, asset valuations (vs. book valuations), etc. We believe debt to asset valuation outweighs minimal profits or low coverage ratios.
- We then review its stock and current news to see if we can identify a changing trend or a new business cycle that corresponds to any improvement. We try to measure performance from the point of the change.
- Finally, we take the idea to our team to see what additional risk they might see or find that hasn’t been factored into the issue.
Five basic steps are observed in nearly every successful turnaround:
- A new management team.
- A new company plan addressing the real issues.
- A significant reduction in costs, including management and personnel.
- Incremental revenue growth from new or improved product lines and/or marketing.
- Implementation of a debt repayment plan.
If companies score high in these key areas and are approaching or appear to be headed towards profitability, especially from the point of a new plan or management, we move them to our target list and diligently watch for any change their progress.
Studies claim almost 70% of the time companies that beat their number last quarter will beat their numbers again in the current quarter, and those who were soft last quarter will have about a 70% chance of being soft again.
We are looking for companies with the new plan and team beating each quarter since making the change. This often becomes a waiting game, as it can take 3 or 4 quarters before we see enough improvement in the quarterly financial metrics to believe that the new plan has a reasonably high degree of being successful.
If we think that from the point of change the company’s performance, as demonstrated in its Actual Financial Reporting, indicates that there is a much greater chance of succeeding rather than of failing, and its debt is still priced as a bankrupt or distressed issue, we will look to acquire it for pennies on the dollar.
Distressed Debt 1 LP is owned and managed by Durig Capital, Inc.
Contact Information –
Durig Capital, Inc.
11600 SW 69th Ave.
Tigard, Oregon 97223
Phone: (971) 327-8847
FAX: (971) 732-5121
Distressed Debt 1 LP questions please ask.