What are Some Examples of Good Distressed Debt Deals Where People Actually Made Money and How Did They Do It?

Distressed debt investing involves purchasing the debt of companies that are in financial trouble at significant discounts. This strategy can be lucrative when done correctly. Here are five notable examples of successful distressed debt deals and the strategies employed by investors to turn a profit:

1. General Motors (GM) - 2009

Background: In June 2009, GM filed for Chapter 11 bankruptcy, and its bonds were trading at a fraction of their face value.

Investment Strategy: Investors who bought GM bonds during the bankruptcy proceedings acquired them at deep discounts.

Outcome: After restructuring, the U.S. government provided a bailout, and GM emerged from bankruptcy in July 2009. The newly issued equity and bonds appreciated significantly as the company returned to profitability. Early investors saw substantial returns once GM went public again in 2010.

2. Chrysler - 2009

Background: Like GM, Chrysler went through a bankruptcy process in 2009.

Investment Strategy: Investors who bought distressed debt during the restructuring phase benefited from the government-backed rescue.

Outcome: Chrysler emerged from bankruptcy after restructuring and merging with Fiat. The value of the new equity appreciated, leading to profits for distressed debt investors who had purchased bonds at low prices.

3. American Airlines - 2011

Background: American Airlines filed for Chapter 11 bankruptcy in November 2011.

Investment Strategy: Investors bought distressed bonds at low prices anticipating a successful restructuring.

Outcome: After restructuring, American Airlines merged with US Airways in 2013, which significantly boosted its financial position. The bonds and equity appreciated as the airline industry recovered, yielding profits for early bondholders.

4. Energy Sector (Various Companies) - 2015-2016

Background: The collapse of oil prices in 2014-2016 led to significant distress in the energy sector, with companies like Chesapeake Energy and Peabody Energy facing bankruptcy.

Investment Strategy: Savvy investors identified undervalued debt and equity in these companies, betting on a recovery in oil prices and operational improvements.

Outcome: As oil prices rebounded and companies restructured, many of these investments saw significant appreciation. For example, some investors who purchased distressed bonds of Chesapeake Energy made returns when the company restructured and its stock price rose post-bankruptcy.

5. J. Crew Group - 2019

Background: The retail giant J. Crew Group filed for Chapter 11 bankruptcy in 2019, facing severe financial challenges.

Investment Strategy: Investors purchased distressed debt and equity during the bankruptcy process, anticipating that certain assets could be sold or repurposed.

Outcome: While the company ultimately liquidated, some investors profited by acquiring and selling off valuable assets such as real estate and brand rights, which were worth more than the debt they held.

Key Takeaways for Successful Distressed Debt Investing

Thorough Research and Due Diligence: Investors must analyze the financial health of the company, including the balance sheet, cash flow, and potential for recovery. Timing: Buying at the right time during the bankruptcy or restructuring process can yield high returns as the company stabilizes. Understanding the Restructuring Process: Knowing how debt will be converted to equity or how new financing will be structured is crucial. Market Conditions: Broader economic trends can significantly impact the success of distressed investments, especially in cyclical industries.

Distressed debt investing carries substantial risk, but with the right strategy and timing, it can lead to significant rewards. By carefully analyzing potential investments and understanding the complex dynamics of restructuring, investors can potentially make substantial profits from distressed debt opportunities.