CFA Institute

Distressed Debt Analysis: Strategies for Speculative Investors by Stephen G. MoyerReview by: Martin S. FridsonFinancial Analysts Journal, Vol. 62, No. 3 (May - Jun., 2006), p. 72Published by: CFA InstituteStable URL: http://www.jstor.org/stable/27651708 .

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Financial Analysts Journal

perspective, he includes in each chapter a commen

tary about a successful merger of a type similar to the disaster described. By skillfully juxtaposing these success stories on his main narratives about

unsuccessful deals, he gives the reader concrete

examples of the ways successful deal makers avoid

succumbing to the highlighted factors of failure. In the concluding chapter, Bruner summarizes

the who, what, where, why, and how of M&A failure and gives some guidance to those seeking successful transactions. His decades of research on the topic suggest that most failures result from a "perfect storm" of numerous factors. His strong contention

is that organizations that adopt attitudes and prac tices to anticipate and deal with the most common elements of merger failure will be more successful in that area of business than peers that do not.

?M.A.M.

Distressed Debt Analysis: Strategies for Specu lative Investors. By Stephen G. Moyer. 2005. J.

Ross Publishing, Boca Raton, FL, +1 (561) 869

3900, www.jrosspub.com. 448 pages, $99.95.

Reviewed by Martin S. Fridson, CFA.

The securities of financially troubled companies might seem an unlikely source of enrichment. Spe cialists in this fascinating sector of the market, how

ever, have devised numerous strategies for

extracting value. Consider just one example: Take advantage of the rule that each class of

creditor must approve a bankruptcy reorganiza

tion plan by taking a sizable position in a junior

security at a small fraction of face value. As a

condition for consenting to the plan, demand that

senior creditors agree to a larger recovery for

junior creditors than the amount to which a strict

observance of the priority of claims would entitle

them. The concession will amount to a mere "tip"

from the senior creditors' standpoint yet repre sent a substantial percentage gain on the minimal

price paid for the junior security.

To execute the maneuvers, such as this one,

described in Distressed Debt Analysis: Strategies for Speculative Investors, one must disguise one's own

intentions while anticipating the actions of other market participants. Author Stephen G. Moyer explicitly likens the resulting interplay to chess. He concludes each chapter with moves from a game

(although not the most famous one) in the celebrated 1972 World Championship match between Bobby Fischer and Boris Spassky

Moyer writes with great authority on his sub

ject. He began his career as a lawyer and now heads research at Imperial Capital LLC, a boutique invest

Martin S. Fridson, CFA, is CEO of FridsonVision LLC, New York City.

72 www.cfapubs.org

ment bank focusing on the debt of distressed com

panies. His commentary is informed by deep knowledge of bankruptcy law and intimate famil

iarity with marketplace practicalities. One especially valuable aspect of the book is its

stress on the limitations of investment theory in an

environment of sparse information. For example,

Moyer describes an application of the classic deci sion tree, which deals quantitatively with invest

ment options and possible outcomes. He notes that in the world of distressed securities, however, "investors need to remain mindful that there will almost never be an empirical basis from which to derive a probability." He explains that because each distressed situation is unique, probability assess

ments essentially consist of the analyst's judgment. Distressed Debt Analysis also supplies a practi

tioner's insight into the supposedly negligible cost of bankruptcy, a controversial assumption used in

capital structure theory. Taking into account both administrative costs and diversion of management time, Moyer says, "Bankruptcy is expensive." Also valuable is the author's highlighting of a potential need, in light of a little-noted provision of the Sar

banes-Oxley Act of 2002, to revise the assumptions

regarding future recoveries in bankruptcy. That

legislation authorizes the U.S. SEC to elevate the status of claims originating in losses incurred by equityholders.

Moyer conveys his technically complex mate rial with clear prose, provides an extensive survey of the literature on risky debt, and embeds several

interesting tidbits in his footnotes. Editorial lapses are minor; they include such common misspell ings

as "Warren Buffet," "Carl Ichan," and

"Arthur Anderson." On one page, readers will

find both "misvaluation" and "misevaluation," the latter being the spelling with which a widely

used word-processing program automatically "corrects" its users. The copy editors also failed to

replace "hone in on" with "home in on" and, in another instance, to eliminate confusion between the verbs "affect" and "effect."

These small imperfections, however, do not undercut the usefulness of Distressed Debt Analysis. It is an authoritative resource for anybody with financial exposure to a company teetering on the

brink of, or already in, bankruptcy. This constitu

ency includes investors who did not become hold ers of distressed securities by design but, rather,

through an investment gone bad. Over the next few years, the default rates on

high-yield bonds and leveraged loans are likely to escalate from their recent cyclical lows. Perhaps

Moyer's book will find a larger audience than the

publisher foresaw.

?M.S.F.

?2006, CFA Institute

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