Friday, November 20, 2009

Distressed Debt Exchanges

Credit Bubble Stocks has been involved in two distressed debt exchanges recently: Georgia Gulf (GGC) and Callon Petroleum (CPE).

According to a WSJ article from this summer, on average only "three distressed exchanges [take] place a year."

"But does it really keep companies from collapsing? One out of two companies that embarked on a distress exchange ended up filing for bankruptcy later, Altman’s research shows. Another 30% of such companies ended up being purchased, with just 20% remaining as stand-alone operating businesses. 'It can work, but often times it doesn’t,' Altman says."
Another tool companies can use is the debt buyback, where they quietly buy their own bonds back at deep discounts to par. "Debt forgiven through buybacks is usually taxed as income, but stimulus legislation allows companies that repurchase debt to delay those taxes until 2014, and then to spread the tax out over a five-year period."

1 comment:

PD said...

a company can't buyback "callable" bonds at a price below the call price. Also some bonds have covenants that don't allow the early purchase of bonds with new borrowed money to take advantage of discounted bond prices.

Obviously, convenants are needed in the language and I am unsure about CPE's case. I do know that those bonds are callable so CPE wasn't buying the bonds.