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k Trim Size: 6in x 9in Altman481805 ffirs01.tex V1 - 02/05/2019 7:46pm Page i Corporate Financial Distress, Restructuring, and Bankruptcy k k k k Trim Size: 6in x 9in Altman481805 ffirs01.tex V1 - 02/05/2019 7:46pm Page ii The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and elec- tronic products and services for our customers’ professional and personal knowl- edge and understanding. k k k k Trim Size: 6in x 9in Altman481805 ffirs01.tex V1 - 02/05/2019 7:46pm Page iii Corporate Financial Distress, Restructuring, and Bankruptcy k Analyze Leveraged Finance, k Distressed Debt, and Bankruptcy Fourth Edition EDWARD I. ALTMAN EDITH HOTCHKISS WEI WANG k k Trim Size: 6in x 9in Altman481805 ffirs01.tex V1 - 02/05/2019 7:46pm Page iv Copyright © 2019 by Edward I. Altman, Edith Hotchkiss, and Wei Wang. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley .com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You k should consult with a professional where appropriate. Neither the publisher nor author k shall be liable for any loss of profit or any other commercial damages, including butnot limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http:// booksupport.wiley.com. For more information about Wiley products, visit www.wiley .com. Library of Congress Cataloging-in-Publication Data is available. ISBN 978-1-119-48180-5 (Hardcover) ISBN 978-1-119-48181-2 (ePDF) ISBN 978-1-119-48185-0 (ePub) Cover Design: Wiley Cover Image: © Ps Pong / Shutterstock Printed in the United States of America 10987654321 k k Trim Size: 6in x 9in Altman481805 ffirs01.tex V1 - 02/05/2019 7:46pm Page v Ed Altman dedicates this book to his wife and partner for over 50 years, Dr. Elaine Altman, whose support and advice have sustained him and helped in crafting these four editions over 35 years. Edie Hotchkiss dedicates this book to her husband Steven and daughter Jenny for their constant support. Wei Wang dedicates this book to his wife Ella and children Andrea, Mia, Julia, and Ethan for their endless love and inspiration. k k k k Trim Size: 6in x 9in Altman481805 f01.tex V1 - 02/05/2019 7:46pm Page vii Contents About the Authors ix Acknowledgments xi Preface xiii PART ONE The Economic and Legal Framework of Corporate Restructuring and Bankruptcy CHAPTER 1 k Corporate Financial Distress: Introduction and Statistical Background 3 k 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 vii k k Trim Size: 6in x 9in Altman481805 f01.tex V1 - 02/05/2019 7:46pm Page viii viii Contents 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 k CHAPTER 13 k 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 k k Trim Size: 6in x 9in Altman481805 fbetw01.tex V1 - 02/05/2019 7:46pm Page ix About the Authors Edward 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. Dr. Altman has an international reputation as an expert on corporate bankruptcy, high-yield bonds, distressed debt, and credit risk analysis. He is the creator of the world-famous Altman Z-Score models for bankruptcy prediction of firms globally. He was named Laureate 1984 by the Hautes Études Commerciales Foundation in Paris for his accumulated works on corporate distress predic- tion models and procedures for firm financial rehabilitation and awarded the Graham & Dodd Scroll for 1985 by the Financial Analysts Federation for his work on Default Rates and High Yield Corporate Debt. He was a Founding Executive Editor of the Journal of Banking & Finance and serves on the editorial k boards of several other scholarly finance journals. k Professor Altman was inducted into the Fixed Income Analysts Society Hall of Fame in 2001 and elected President of the Financial Management Association (2003) and a Fellow of the FMA in 2004, and was among the inaugural inductees into the Turnaround Management Association’s Hall of Fame in 2008. In 2005, Dr. Altman was named one of the “100 Most Influential People in Finance” by Treasury & Risk Management magazine and is frequently quoted in the popular press and on network TV. Dr. Altman has been an advisor to many financial institutions including Merrill Lynch, Salomon Brothers, Citigroup, Concordia Advisors, Investcorp, Paulson & Co., S&P Global Market Intelligence and the RiskMetrics Group (MSCI, Inc.). He is currently (2018) Advisor to Golub Capital, Classis Capital (Italy), Wiserfunding in London, Clearing Bid, Inc., S-Cube Capital (Singapore), ESG Portfolio Management (Frankfurt) and AlphaFixe (Montreal). He serves on the Board of Franklin Mutual Series and Alternative Investments Funds. He is also Chairman of the Academic Advisory Council of the Turnaround Management Association. Dr. Altman was a Founding Trustee of the Museum of American Finance and was Chairman of the Board of the International Schools Orchestras of New York. Edith S. Hotchkiss is a Professor of Finance at the Carroll School of Management at Boston College, where she teaches courses in corporate finance, valuation, and restructuring. She received her AB in engineering and economics summa cum ix k k Trim Size: 6in x 9in Altman481805 fbetw01.tex V1 - 02/05/2019 7:46pm Page x x About the Authors laude from Dartmouth College and her PhD in finance from NYU’s Stern School of Business. Prior to entering academics, she worked in consulting and for the Financial Institutions Group of Standard & Poor’s Corporation. Professor Hotchkiss’s research covers topics including: corporate financial distress and restructuring; the efficiency of Chapter 11 bankruptcy; and trading in corporate debt markets. Her work has been published in leading finance journals including the Journal of Finance, Journal of Financial Economics, and Review of Financial Studies. She has served on the national board of the Turnaround Management Association, and as a consultant to FINRA on fixed income markets. She has also served as a consultant for several recent Chapter 11 cases. Wei Wang is an Associate Professor and RBC Fellow of Finance and Direc- tor of Master of Finance–Beijing program at the Smith School of Business at Queen’s University, Canada. His research interests are in bankruptcy restructuring, distressed investing, and corporate governance. His work has been published in leading academic journals including the Journal of Finance and Journal of Finan- cial Economics, and featured in the Wall Street Journal and other media.
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