Corporate Financial Distress, Restructuring, and Bankruptcy

A comprehensive look at the enormous growth and evolution of distressed debt markets, corporate bankruptcy, and credit risk models

This Fourth Edition of the most authoritative finance book on the topic updates and expands its discussion of financial distress and bankruptcy, as well as the related topics dealing with leveraged finance, high-yield, and distressed debt markets. It offers state-of-the-art analysis and research on U.S. and international restructurings, applications of distress prediction models in financial and managerial markets, bankruptcy costs, restructuring outcomes, and more.

About the Authors ix

Acknowledgments xi

Preface xiii

Part One The Economic and Legal Framework of Corporate Restructuring and Bankruptcy

Chapter 1 Corporate Financial Distress: Introduction and Statistical Background 3

Chapter 2 An Introduction to Leveraged Finance 21

Chapter 3 An Overview of the U.S. Bankruptcy Process 39

Chapter 4 Restructuring Out-of-Court and the Cost of Financial Distress 71

Chapter 5 Valuation of Distressed Firms 91

Chapter 6 Corporate Governance in Distressed Firms 117

Chapter 7 Bankruptcy Outcomes 135

Chapter 8 International Evidence 147

Part Two High-Yield Debt, Prediction of Corporate Distress, and Distress Investing

Chapter 9 The High-Yield Bond Market: Risks and Returns for Investors and Analysts 165

Chapter 10 A 50-Year Retrospective on Credit Risk Models, the Altman Z-Score Family of Models, and Their Applications to Financial Markets and Managerial Strategies 189

Chapter 11 Applications of Distress Prediction Models: By External Analysts 217

Chapter 12 Distress Prediction Models: Catalysts for Constructive Change-Managing a Financial Turnaround 235

Chapter 13 A Bottom-Up Approach to Assessing Sovereign Default Risk 245

Chapter 14 The Anatomy of Distressed Debt Markets 265

Chapter 15 Investing in Distressed Firm Securities 277

Chapter 16 Modeling and Estimating Recovery Rates 295

References 315

Author Index 335

Subject Index 343

EDWARD I. ALTMAN is the Max L. Heine Professor of Finance, Emeritus at New York University, Stern School of Business and Director of the Credit and Fixed Income Research Program at the NYU Salomon Center.

EDITH HOTCHKISS is a Professor of Finance at the Carroll School of Management at Boston College.

WEI WANG is an Associate Professor and RBC Fellow of Finance, and Director of Master of Finance – Beijing program at the Smith School of Business at Queen’s University, Canada.

For more than thirty-five years since Altman’s 1983 pioneering work, Corporate Financial Distress, Restructuring, and Bankruptcy has been the definitive guide to the science behind what happens when businesses fail. This fully revised, expanded, and updated Fourth Edition gives experienced managers, advisors, investment professionals, and academic researchers and instructors, as well as students new to the field, state-of-the-art knowledge of restructuring practices, distressed debt and high yield bond and loan markets, credit analysis and default prediction.

This new edition reflects major market developments and progress made since the global financial crisis. Joining the iconic Edward Altman, the Stern School of Business professor who created the Z-score model half a century ago, Edith Hotchkiss and new contributor Wei Wang continue to provide the indepth coverage readers have relied on. The opening section of this volume examines the economic and legal framework of corporate bankruptcy and distressed restructurings and the leveraged finance market. Highlights of the expanded coverage of Section One include:

• Newly added chapters examining leveraged finance, out-of-court restructurings, and international insolvency codes
• An extensive stand-alone primer explaining the U.S. Chapter 11 process, providing an accessible summary of concepts important to legal, financial, and other professionals
• Discussion of current issues and complexities in governance of distressed firms
• A guide for best practices in valuation of distressed firms

Section Two provides insights into the latest techniques for modeling credit risk, especially for risky debt market issuers. Highlights include:

• An examination of risk and return in the high yield bond market
• A retrospective view of the Altman Z-score family of models and their use in practice over the last 50 years
• Estimation of default probabilities for both U.S. and sovereign issuers
• Modeling and measuring recovery rates
• Analytics for investing in distressed securities

Based on the most current research and practice, Corporate Financial Distress, Restructuring, and Bankruptcy, Fourth Edition offers a comprehensive look at the rapidly evolving restructuring industry.