Book Review: Altman's 'Corporate Financial Distress and Bankruptcy'

by: Colin Peterson

A thorough primer on bankruptcy is "Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt," by New York University professor Ed Altman.

This is the third edition and reflects the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Altman books and papers are consistently packed with data tables and charts: historical default rates, historical recovery rates, a list of U.S. distressed debt and equity managers as of 2005, etc. There is a 15-page bibliography of papers and books covering all of the topics in the book.

Did you know that an "important determinant of ultimate recovery rates is the amount of junior liabilities that a given seniority has below its level"?

And you may know that default rates and recovery rates are inversely related, but "simply estimating the level or change in GDP does not come close to matching the explanatory power of the default rate, at least for explaining bond recovery rates."

Also amazing: "in 68 percent of the Chapter 7 cases [in a study by Bris, Welch, and Zhu (2004)] the bankruptcy fees 'ate' the entire estate."

I would give this a 3/5, since Altman's works on distressed debt are more theoretical. For practical distressed debt trading and investing ideas, turn to Moyer's "Distressed Debt Analysis."

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