Distressed Investing for the Long Run

Marc ShermanDalton Investments

CFA LA Presentation, October 2014

What You Need to Know

Distressed Debt Analysis: Strategies for Speculative InvestorsBy Stephen Moyer

Competitive Strategy: Techniques for Analyzing Industries and CompetitorsBy Michael E. Porter

The Art is in Connecting the Two

Distress Comes and Goes

Time

Dist

ress

If It Were Only This Predictable …

Business Perspective: How Long?, How Deep? What Flavor?

Time

- D

istre

ss

+

Time?

Time?

Business Questions for the Long Run

Time

- D

istre

ss

+

Price

Yield

Strategy: Return Bogey? Long Only or Long-Short?Asset Allocation: SP? Credit? Equity?Staffing: How Many? What Skills? “R & D”?

The Nature of a Distressed Investment

$200 mn bonds at 70 cents

Bonds drops to 3 cents; $55 mn DIP was converted to equity

Company focuses on EBITDA; refinances ABL, buys back stock

FLWS buys Gift for $142.5 mn

BK Entrance/Exit

BK Valuation $75M

Well Known Gift Bus.

Majority of the Return Came through Re-Org Equity

Distressed Investing for the Long Run

• Key Success Factors: – Long-Short Credit and Equity– Match Liabilities with Assets (ALM)

• 3 Year Lock-up/Commitment– Return Bogey defined relative to HYG

• Adapt to the Risk/Return Opportunity Set– ‘Center of Gravity’ Credit, Equity as a Hedge or ‘Parking Place’ while

awaiting Credit Opportunities– Less Positions, More Business Knowledge

• 15-20% (cost) Maximum Position Concentration– Fees

• Maintain Detailed Business Knowledge• Do the “R & D” to find the Next Opp. Set

Distressed Investing for the Long Run

Questions/Conclusions