Review – Free Capital

Free Capital: How 12 Private Investors Made Millions In The Stock Market

by Guy Thomas, published 2011

A methodical review of investors and their strategies

The greatest strength of “Free Capital” is its organization and layout– it’s truly like visiting an expertly-designed website in that the author has organized his investor interviews by four major descriptive categories:

  • geographers; top-down investors who begin with a macro thesis then look for companies and financial instruments which will benefit from that trend
  • surveyors; bottoms-up investors who start looking at individual companies and then sometimes check to see what kind of macro conditions might affect them
  • activists; investors who tend to get personally involved with their investments, taking large stakes and developing a close relationship with management
  • eclectics; people who don’t really fit any mold, but might be day-traders, value investors, sometimes activists, etc.

Within each categorical section are profiles of 12 (in total) investors that Guy Thomas spoke with, many of whom are anonymous, most of whom he came into contact with via investor message boards he participates on, and all of whom are UK-based and have managed to grow their capital into millions even over the last decade or less.

Though many were once employed by others and some came from financial backgrounds, all are now independent, full-time investors who live off of their investment returns and it is this kind of self-directed lifestyle and the resources which are needed to finance it that primarily lend themselves to the book’s title.

What’s really great is that in each chapter, Guy Thomas begins with a quick “tearsheet” profile of the investor’s strategy, key phrases, holding period, etc., then neatly organizes the interview material into background on the investor’s life and development as a financial person, outlines their strategy, experiences and any particularly demonstrative coups or failures they’ve enjoyed (or suffered) and finally and extremely helpfully, summarizes all the material again in a table at the end with the major themes or ideas explored for quick reference.

As if this weren’t enough, Guy Thomas has written a lengthy (and for once, interesting) introduction to the book that serves as a combination summary of the main themes of the book as well as a how-to manual for those looking to get the most out of their reading. Thomas is correct in suggesting that the book can be read all the way through as a complete work, or explored at random based on what, if anything, sounds interesting to the reader.

It’s touches like this that show a thoughtfulness on the part of the author that leave the reader painfully aware of their absence in comparison to many other books in the genre. Frankly, it’d be nice if authors and publishers took Thomas’s lead on this point!

My favorite part: inspiration

I was excited to dig into the book in part because a friend had mentioned it to me and had commented favorably on it. He said a lot of the material covered wouldn’t be original but that I might find it inspirational to read other people’s stories of how they got where they are.

Maybe it’s where I am in my life right now, maybe it’s the subtle suggestion my friend made planted in my mind, or maybe it’s the shining spot for the book but the inspiration was one of the most important things I took away from the book. Some of the profiles were admittedly unhelpful (such as the day-trader, an investment style I can’t see any point in) or just not interesting to me (a few of the investors followed research processes I don’t have the time or motivation to emulate), but there were a couple I identified with, which made me feel empowered and hopeful about myself as I read them.

I particularly liked the two named investors, John Lee (who is a dividend-oriented value investor of sorts) and Peter Gyllenhammar (who bankrupted himself twice before hitting his stride and amassing his current fortune). I believe all of the investors lives and experiences illustrated this point well, but these two in particular were examples of the phrase “Patience is a virtue.” If a man can dust himself off after two bankruptcies and still make something of himself he can probably do just about anything given the time and the patience. Seeing as how I haven’t suffered personal bankruptcy (yet) I felt greatly advantaged to learn from this example of perseverance and triumph over failure.

Wise aphorisms

Another theme oft explored in “Free Capital” is the role simplicity plays in good investing. To that effect, I found a lot of great investing ideas captured in brief, simple aphorisms that made them both easily digestible and sufficiently memorable to make use of them myself in my own deliberations. Some examples include:

  • Good investing “requires only a few good decisions” (a helpful reminder given the way many seem to imply that a true investor is marked by the numerousness and hyperactivity of his ideas)
  • An activist is an investor who goes looking for trouble
  • “Quiet freedom is itself exotic” (in this way, independent investors lead quite adventuresome and even exciting lives!)
  • Exposure to some chances can only arise through deliberate and possibly unpopular and eccentric choices
  • Investment skill consists in not knowing everything, but in judicious neglect: making wise choices about what to overlook
  • Freedom is like income that cannot be taxed
  • To make good decisions, you need to look actively for reasons not to buy a company. And then invest only in those where you can live with the reasons
  • Time is a limited resource with strongly diminishing returns. The first hour you spend researching a company is much more important than the tenth hour
  • If an investment decision requires detailed calculations, you should pass, because it’s probably too close
  • The sun shines even on the poor man

Also of note is the author’s book-companion blog, which goes into a bit more detail on some of the investment themes captured in the book and which I’ve found to be a good supplement to the reading seeing that I was still interested to learn more even after I put it down.

Conclusion

“Free Capital” is a unique offering. It has a styling and organization that many books in its genre lack and I hope this effort is continued in any future titles from the author. And it treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.

It’s not without its flaws, of course. As the author himself states, the book doesn’t cover losing investors, people who took some of the risks investors profiled took, and failed, or who took other risks that didn’t turn out right, and then explores what lessons can be learned from their shortcomings. This probably could be a worthwhile book in itself, as there is a growing literature on “failure studies” and as the first lesson every investor must learn is “don’t lose what you’ve got”, learning of common mistakes to avoid could be helpful. Additionally, as an avid deep value (Benjamin Graham) guy myself, I could’ve done without the day trader and some of the other guys who seem like GARPy, momentum-based swing traders with short time horizons and questionable “value” metrics.

But those are minor quibbles and things that Guy Thomas could easily rectify by simply writing us more great books to read! Overall, “Free Capital” was entertaining, at times enlightening and best of all, extremely gracious with my free time as I read the entire thing in just three or four hours. Given the focus on the value of time in the book, I appreciated the fact that I could digest the meat of the book and walk away with some great insights to help my own investing… and still have time left in the day to get other things done!

Review – Panic: The Betrayal Of Capitalism By Wall Street And Washington

Sadly, Panic: The Betrayal Of Capitalism By Wall Street And Washington does not appear to be in print any longer. Luckily, I found a good used copy on Amazon and will cherish its now-secret message all the more.

As I read through this book several months ago, instead of summarizing my thoughts I just want to record a few key ideas and quotes for later reference.

“The Anti-Entrepreneurs”

In any modern state the government will always be the banks’ biggest client and therefore will always make most of the rules, even if it pretends not to.

The ideologues of modern finance offered to make any fool rich if only he renounced the first obligation of the capitalist, the burden of judgment.

This process of confronting uncertainty and successfully resolving it usually by dint of hard work, diligent analysis, and sound judgment is the only source of what many economists have called “entrepreneurial profit” or sometimes “true profit”.

Underpinning the ideology of modern finance is the notion that the insight, judgment and even diligence of the entrepreneur are irrelevant for investing in public securities markets. These markets, we are told, are special, too powerful and too perfect to allow any entrepreneur’s judgment to matter.

If the ideology of modern finance had a motto, it might be “thinking doesn’t work.”

Capitalism demands free markets because it needs free minds.

The bureaucrat of capital dreams of a world in which failure is impossible.

Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.

“New Risks in Old Bottles”

The great mission of modern investment theory is to replace all idiosyncratic risk with systemic risk.

The primary skill for finance, under this theory, becomes diversification, which becomes an advanced statistical methodology for making sure a relatively small number of securities accurately represents a much larger class of securities.

If I know nothing, my need for diversification is infinite.

All investment is reduced to insurance.

Ignorance is the father of panic.

“The Misinformation Economy”

One way to think about panic is as a general, nonspecific response to a poorly understood particular and specific problem.

“To build a perfect model of the universe would require all the matter and energy in the universe, because the only perfect model, the only model that shed no information and made no compromises in order to achieve its object, would be the universe itself.”

The mortgage meltdown can be understood as an instance of model failure.

information is differentiation; information is what comes as a surprise against the background of knowledge already possessed.

If uncertainty and risk are nearly synonyms. then information and risk are nearly opposites.

It is not particularly unusual for all thirty stocks in the Dow to go up and down at the same time; that rarely happened when market participants were interested in the value of individual companies.

“The Reign of Risk”

Modern portfolio theory was a late bloom of the great eighteenth and nineteenth century impulse to explain human society by mechanical or “scientific” principles as regular as those of classical physics.

If economics were about entrepreneurship, it would not look like physics. It would look a little like philosophy. Mostly it would look like literature. [The Lion’s note: if you ascribe to the Austrian school, it does!]

To treat investment as a quantitative exercise relying on the efficiency of markets and advanced mathematics to eliminate the hazards of human judgment. [the ambition of investors under Modern Portfolio Theory]

MPT created a field for which PhDs could be granted and journal articles published. Before MPT, investment theory had been mere reflection upon experience, a wisdom literature dominated by amateurs like Benjamin Graham.

[MPT…] can be deeply attractive to those trying to support capitalist lifestyles with only bureaucratic talents.

The most important question any investor can ask: For what are investors paid? MPT’s answer: For accepting risk.

risk is not the foundation of profit but its most dreaded enemy.

The modern theory conceptually severed financial markets from the rest of the economy. [My note, ” Macro is to Micro as Financial is to Real”]

“The Romance of Risk”

Men and societies become richer precisely as they employ insight, skill and experience, effort and discipline to reduce risk.

Investors are paid for being right, not for the possibility of being wrong.

In life, men who make one good judgment tend to make more good judgments; men who make one bad judgment tend to make more bad ones.

the most important but the most difficult-to-identify ability in business management (or investment) is the ability to judge other men’s ability to judge. [meta-judgment]

“Zoom, Zoom, Zoom”

What modern capital markets do very well is raise large amounts of capital from a broad base of investors who are persuaded to give their money to perfect strangers with precious little idea of what those fortunate recipients are going to do with it. [And, I’d add, little control or legal right to have any say in such decisions; “crowd-sourcing”]

different markets make different trade-offs between liquidity and price discovery one one hand and confidence about value on the other.

Public equity investors demand liquidity in large part because they are unsure about value.

Humor is surprise

It is reasonable to call markets better or worse depending on how much surprise they can absorb before convulsing in dramatic disequilibrium

Lacking a more substantial basis on which to make decisions, financial markets set prices to an astonishing extent by watching– prices!

The most dramatic resolution of this conflict is to eliminate most of the shareholders altogether by taking public companies private

public companies have no owners

Companies, like most assets, do better with strong owners than weak owners.

“Strategic Ambiguity”

When New Dealers tried to set up a banking system immune to panic, their top priority was to remove Mom-and-Pop from their role as bank police.

“Insolvent Immunity”

Here is the quickest way to determine whether you are operating in an honest capitalist system or a corrupt imitation thereof: check the bankruptcy rates.

“Black September”

“Things are somewhat amiss when a country’s finance minister plays bond salesman for a supposedly privately owned company.”

By this time the government had: (a) intimated that deficits in the financial sector were so large and widespread that “anyone could be next” (b) terrified private investors from making investments that might preserve the solvency of deteriorating institutions (c) assumed unprecedented responsibility for investment banks outside the Federal Reserve system and then abandoned that responsibility and (d) made clear that its policy would change on an ad hoc basis. [on the US federal government’s initial response to the financial panic of 2008]

To assume that the buying and selling of shares amounts to managing the firm is the most extreme form of efficient market worship.

“Capitalism Without Capitalists”

The term for someone who rests his economic fate on unknowable future events is not “owner” or even “investor,” but “speculator.”

the government, the biggest player and the weakest owner of all. [criticizing the present ownership of major banks]

Another great review of this book was posted by “CP” at CreditBubbleStocks.com.

And after reading this book, I was inspired to purchase Frank Knight’s Risk, Uncertainty and Profit for my library for further study.

 

Notes – Distressed Debt Analysis

Distressed Debt Investing: Strategies For Speculative Investors

by Stephen G. Moyer, published 2004

Distressed debt: a true contrarian investment strategy

The following note outline was rescued from my personal document archive. The outline consists of a summary of Stephen G. Moyer’s integral handbook on distressed debt dynamics, Distressed Debt Analysis. The notes currently cover chapters 1-4. They are incomplete at present. I will likely not revise these notes and instead plan to release a new series of notes on this book in the future when I re-read it.

Distressed Debt Analysis

  1. Chapter 1 – Introduction
    1. What is “distressed debt”
      1. Some define based off of credit ratings, which lacks rigor because:
        1. credit ratings lag fundamental credit developments
        2. credit ratings essentially only handicap the risk of default, they say nothing of whether the price is appropriate for the risk
      2. Martin Fridson advocates defining debt as distressed when it trades with a yield to maturity greater than 1000 basis points more than the comparable underlying treasury security
      3. Moyer suggests the following:
        1. equity value is diminimus (eg, under $1/share)
        2. all or some portion of unsecured debt trading at a market discount of more than 40%
        3. this pattern implies a balance sheet restructuring, resulting in creditors owning a significant portion of equity, or else a sale of assets and subsequent liquidation
    2. Distressed debt investing is not for everybody
      1. significant risk of loss
      2. often an informational advantage for professional participants
      3. markets are often illiquid, significantly increasing transaction costs
      4. average trading size is sufficiently large to rule out the average investor
    3. Potential restructuring events introduce significant levels of complexity
      1. Will restructuring occur within or outside of a bankruptcy context?
      2. What is the risk of a loss of economic value due to loss of key customers, suppliers or employees?
      3. How much economic value might be gained via bankruptcy?
      4. If balance sheet is restructured, what will new components look like and who will win and lose?
      5. What are the tax consequences?
      6. Any investors with “controlling” stake allowing them to unfairly influence the process at the expense of others?
    4. Common considerations of a distressed investment:
      1. What is the cause of distress?
      2. How will the distress be resolved?
      3. What are the implications of that resolution on the value of the business or particular securities?
      4. What actions on the part of bondholders are being assumed to realize a particular outcome?
      5. Will the price of the instrument in question go up or will it be exchanged into other securities requiring a new analysis?
  2. Chapter 2 – The Distress Debt Investing Opportunity
    1. investment grade bonds
      1. BBB or higher – investment grade
      2. lower than BBB – speculative grade
      3. fallen angel – a company that goes from investment grade to speculative grade
      4. bonds that go from BBB to BB or lower may result in forced selling for fund managers who by law must hold BBB or higher, creating an opportunity for distressed debt investors
      5. alternately, fallen angels may force speculative grade fund managers into “forced buying” when they are added to an index, creating another opportunity
      6. PRECURSORS TO DEFAULT
        1. economic performance- economic softness generally gives rise to falling revenues and cash flows, putting many companies into distressed situations
        2. relative quantity of low-rated bonds
          1. low-rated bonds tend to default more often
          2. downgrades and new issuance can increase the number of low-rated bonds
        3. capital markets liquidity- highly leveraged companies are often more dependent on capital markets for on-going financing
          1. the appearance of a recession can restrain a levered companies ability to float more debt
          2. general risk aversion or investor disinterest with the junk bond market can increase financing challenges for companies
          3. a bear market in stocks can shut off another source of funding for these companies
      7. MARKET CONDITIONS THAT PERMIT SUPERIOR RETURNS
        1. equal access to information
          1. hundreds of high-yield issuers have no analyst coverage
          2. many transactions are done OTC
          3. many high-yield issuers have no public equity and thus do not fill out SEC reports
          4. when companies file for bankruptcy, they often delay or totally fail to file SEC reports
          5. two levels of information in bankruptcy proceedings: restricted nonpublic info; publicly available info
          6. the seller of heavily discounted bonds may know something you do not
        2. rational behavior- absence of “free will”, “coerced” sales:
          1. sales by banks to maintain portfolio quality standards often not based on “fair value”
          2. institutional investors may have earnings goals and sell an asset for less than they deem it is worth but still more than its carrying cost, satisfying the goal
          3. high yield, open ended mutual fund managers may be forced to liquidate holdings to meet investor demands for redemption following a swift change in sentiment about their asset class
        3. low transaction costs
          1. settlement fee, including commission to broker- generally nominal, but indeed higher than large-cap equity or other mainstream transactions
          2. “unwind” fee, represents bid-ask spread in the market
            1. this fee can often be a point or more
            2. on highly speculative bonds it can often consist of several % of the total value of the trade
            3. this reduces potential liquidity and volume of exchange in the markets
  3. Chapter 3 – Conceptual Overview of Financial Distress and the Restructuring Process
    1. the value of assets is typically uncertain and subjective
    2. EMT theory suggests the market can be relied upon to accurately asses the value of assets and thus one can infer the value of a firm’s securities
    3. in reality, the market makes dramatic reassessments of securities, positive and negative, often with very few fundamental changes in the business
    4. declines in asset value can be handled fairly flexibly when the capital structure is composed of equity; when the capital structure is composed of large amounts of debt this becomes tricky (due to debt covenants)
    5. two solutions
      1. increase the value of the company (unlikely possibility or management would’ve done it)
      2. resize the capital structure
    6. resizing is accomplished via the restructuring process, a combined legal and financial operation
  4. Chapter 4 – Legal OverView of Distressed Debt Restructurings
    1. OUT OF COURT RESTRUCTURINGS: THE PREFERRED OPTION WHEN EFFECTIVE AND FEASIBLE
      1. The Financial Effects of an Out-of-Court Restructuring
        1. Firm and its most significant creditors negotiate a change in the terms of obligations or a voluntary exchange of financial interests
        2. debt for equity or reduced debt for new debt and equity are typical arrangements
        3. the post-reorganization capital structure is fairly “arbitrary”; the company may eventually flourish under a number of different capital structures
        4. because it is not handled in court, this settlement can not change or negate the interest of other claimants not participating in the restructuring
        5. the restructuring can involve payments of cash instead of exchanges of securities
      2. The Out-of-Court Restructuring Process
        1. Parties Involved
          1. With bank debt, the negotiating agent is usually self-evident and is often a previously chosen “agent” of a loan syndicate specified in the loan agreement
          2. With bonds, typically represented by a small group of significant bondholders who form an informal bondholder committee, in practice >=25% of all bonds
          3. There are often agendas involved; commonly people are united around the cause of achieving the most economic value from their claims as possible, but opportunists might see a way to cheaply “acquire” equity which might be profitable in the future
          4. The view of the “job” of forming a bondholder committee is subjective; a hedge fund may see it as an intended part of the investment; a mutual fund or insurance company might consider it to be an embarrassing but necessary evil
          5. The bondholder committee has no legal authority to bind either member or nonmember bondholders
        2. Strategic Considerations in Participating on the Bondholder Committee
          1. If the objective is to invest so as to participate in the bondholder committee, one must be prepared to accumulate a significant quantity of the bonds
          2. an investor may be forced to sign a “confi” (confidentiality agreement); the investor gains the best material information available but must make disclosures of possession of such information (but not the info itself) when trading, which could make trading more difficult
          3. restriction begins at the receipt of material non-public info and ends when the information becomes non-material or is publicly disclosed via an 8-K, 10-Q or 10-K
          4. counter-parties which have become restricted must execute a “big-boy letter”
            1. an acknowledgement by the nonrestricted party that they are aware the counter-party has material non-public info
            2. a waiver of claims the nonrestricted party might otherwise have under securities law
            3. typically executed by a broker-dealer to maintain anonymity
        3. Beginning the Process
          1. when the debt is bank debt, usually begins because the borrower is in or approaching technical default of some provision of the loan
          2. when the debt is bonds and there is no or little bank debt, an investment bank or other restructuring specialist is often hired on retainer for advice
          3. if out-of-court looks like an option, the firm can
            1. invite creditors to organize a bondholders committee
            2. propose a restructuring without prior consultation
        4. Implementing the Restructuring
          1. with bank debt, usually involves an amendment to the loan agreement
          2. with bonds and a bondholder committee, usually a relatively simple private exchange
        5. Feasibility: The Holdout Problem
          1. those not participating in the restructuring may be better off than those who do, but if nobody participates, all will be worse off
          2. with too many holdouts, the company’s only option is bankruptcy, which often just adds legal costs and reduces everyone’s final recovery
          3. holdouts may be managed via:
            1. moral sanction– the distressed debt market is small and the big players are well known so most deals happen within a context of familiarity and consideration for the future of relationships
            2. coercive structural devices– use of tender offers to strip out covenants on the holdouts, forcing them to participate
    2. IN-COURT RESTRUCTURINGS: AN OVERVIEW OF THE BANKRUPTCY PROCESS
      1. Intro
        1. it is hardly ever a surprise when a firm files for bankruptcy
          1. market prices have typically adjusted prior to the filing to represent the fear and uncertainty
        2. many firms send signals and warnings to the market before doing so
          1. distressed debt situations are often illiquid and you can not wait for the “bottom” to accumulate a position
        3. some or all of the creditors will usually incur some financial loss
        4. the key is not to buy at the bottom but to buy for less than things are worth
      2. Declaring Bankruptcy
        1. begins with a petition filed at a bankruptcy court, filed by the debtor and known as a “voluntary petition”
        2. in a few cases, three or more creditors may have grounds for filing an “involuntary petition”
        3. Chapter 11 contemplates allowing the existing management to reorganize the debtor as a going concern
        4. Chapter 7 anticipates that a court-appointed trustee will supervise the liquidation of the debtor’s assets
        5. Jurisdiction of Filing
          1. if a prepackaged plan has been put together, a jurisdiction with a reputation for expediting the process may be chosen
          2. if management anticipates a fight with creditors, it might choose a more “debtor” or “home-town” friendly jurisdiction
          3. DDI need to consider the relative level of bankruptcy planning that has occurred or may be possible, the probable jurisdiction of filing and what this implies for the timing of the resolution and the potential effect on the treatment of various claims
        6. Timing of Filing
          1. debtor will typically choose to file before it is in material breach of an agreement, which would allow creditors to make an involuntary filing
          2. the debtor will often try to conserve or charge up liquidity prior to the filing by stretching payment to vendors and creditors and utilizing revolving lines of credit
          3. everything that occurs before filing is considered “prepetition” and everything afterward is “postpetition”, which are senior to “prepetition” claims
          4. when the management of the debtor continues to operate the business postpetition, it does so as fiduciary of the creditors, known as “debtor in possession”
            1. tasked with managing day-to-day operation of biz
            2. anything outside the scope of ordinary business, such as sale of a major asset, requires approval of the bankruptcy court
          5. chapter 11, creation of “official committee of unsecured creditors”
            1. appointed by U.S. Trustee under the Bankruptcy Code
            2. supposed to consist of the seven largest creditors willing to serve
          6. equity holders are allowed to participate in the process and vote on acceptance of the plan for reorganization in certain cases
      3. The Goal: The Plan of Reorganization
        1. Intro
          1. plan of reorganization is a legal document that discusses what will happen to the debtor, its assets and all constituent liabilities, including equity interests, upon the debtor’s exit from bankruptcy
          2. confirmation of the plan is a pivotal legal event which instantaneously alters, with significant uncompensated loss in most cases, preexisting legal relationships such as lending agreements, leases and other contracts
        2. The Role of Exclusivity and Prefiling Coordination
          1. in cases of significant cooperation, management and creditors may work out a tentative plan and have it readied for a vote before the bankruptcy petition, called “prenegotiated” chapter 11 filing
          2. opposite end of the spectrum, an abrupt filing or one lacking consensus is called “free-fall” chapter 11
            1. often a warning sign that the bankruptcy process may be especially lengthy (1-3yrs) and expensive
            2. may signal the reorganization will involve a change of management, introducing a new element of risk
        3. Content and Structure of the Plan
          1. identifies claimants and assigns them to classes for purposes of voting and priority
          2. class usually determined by commonality of interest
          3. similarity involves similar priority against the debtor
          4. provides for what, if anything, each class will receive in the reorganization
          5. all claims grouped within a class must be treated similarly
      4. Operating Under Chapter 11
        1. Stabilizing Operations
          1. automatic stay freezes all creditors in their prepetition state
          2. grants debtor some “breathing room” and financial flexibility
          3. debtor-in-possession allows a super-priority interest against assets to be granted to postpetition lenders
          4. rollup, conversion of a prepetition claim into a postpetition claim through an offer to become a DIP lender
          5. critical vendor motion occurs when the bankruptcy court allows the debtor to pay critical vendors to allow for the continuance of business
          6. KERP, key employee retention plans are often negotiated
        2. Developing a Going-Forward Business Plan
          1. downsizing the labor force, closing unprofitable facilities, selling noncore lines of business or assets and renegotiating various contracts are typical
          2. making a new acquisition is not common although not technically prevented by the law
        3. Determining the Assets and Liabilities
          1. assets
            1. voidable preferences are transactions and distributions that occurred before bankruptcy filing which need to be unwound
            2. fraudulent conveyance, occurs when a debtor did not receive fair value in the transaction in question and at the time or as a result of the transaction was insolvent
            3. debtor may be seeking assets through ongoing legal actions and complaints
          2. liabilities
            1. executory contract rejection and expunging of unexpired leases
        4. Determining the Valuation and the New Capital Structure
          1. “best interests test”, no creditor should come out with less in a reorganization than they would under a liquidation
      5. Voting on and Confirming a Plan of Reorganization
        1. a solicitation package is approved by the creditors and then sent to all holders of impaired claims and interests
        2. for acceptance, 50% in number of claims representing 66 ⅔% of the amount must vote in favor
      6. Summary
        1. chapter 11 is the result of a failure to reach a consensual restructuring
        2. bankruptcy proceedings are complicated and involve substantial negotiation and gamesmanship
        3. the DDI must gain an appreciation for the other participants and their leverage
        4. secured claims will have greater assurance of recovery but lower return potential
  5. Chapter 5 – Overview of the Valuation Process