Contrarian Capital Management, LLC.

Why focus on distressed investing?

When bonds / bank debt trade from a yield curve to a value basis, e.g. following an event such as a bankruptcy filing, it is often a very inefficient market where assets can trade at significant discounts to their inherent value. This can be caused by a number of factors, including: technical selling pressure when institutional and traditional investors are forced to sell due to credit downgrades or other constraints; lack of institutional research; limited market-making activities resulting in illiquidity.

Additionally, distressed situations exhibit high barriers to entry: they require considerable knowledge of the restructuring process, bankruptcy law and individual companies’ legal documentation, and conventional valuation parameters are often inadequate.

This creates opportunities for firms such as Contrarian – with the necessary experience and expertise – to capture the ‘spread’ between a security’s trading price and its inherent value and, over the long term, generate equity-like returns with the protection of being a creditor.

Identifying off-the-run distressed investment opportunities

-Search for less-heavily-trafficked ideas away from the crowd

-Specialize in privately-traded instruments with significant barriers to entry

Research beyond the numbers

-Strict requirement that all research is performed in-house

-Get behind the numbers and seek an ‘edge’ in each situation –
gain a more accurate understanding of a company’s capital structure,
legal framework and documentation and/or prospects than our
competitors / the market

Focus on a company’s fundamentals

-Identify good businesses with solid management, but bad balance sheets,
that will revalue once the capital structure has been fixed

-Strong bias towards cash flow positive businesses (3-6x EBITDA)

-Preference for manufacturing (hard assets) versus service businesses

-Never buy what will ‘go away’ in bankruptcy

Teamwork

-Ideas are analyzed from multiple perspectives by multiple investment
professionals in an effort to minimize fundamental research errors