Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Bankruptcy/Chapter 11 / Bonds

Detroit Files for Bankruptcy: Any Investment Opportunities?

The City of Detroit, Michigan filed for Chapter 9 bankruptcy protection on July 18. (Chapter 9 is the chapter of the Bankruptcy Code that covers municipal bankruptcies.) Detroit is reported to have around $18 billion in debt, making it by far the largest Chapter 9 bankruptcy in history. The next two largest Chapter 9 cases are Jefferson County, Alabama, which filed in 2011 with $4.2 billion in debt and Orange County, California, which filed in1994 with about $2.0 billion in debt.

Distressed municipal bonds can sometimes be good investments because the market for this type of bonds is even more inefficient than for most other types of distressed securities. However, we think it is too early to consider buying any of the Detroit securities. Detroit’s bankruptcy case is likely to be very long and complicated. The city is in a long-term decline, and it faces a whole host of financial and operational issues.

The other two large Chapter 9 cases were relatively simple by comparison. In each of those cases it was a fairly isolated issue that caused the bankruptcy. Even so, both bankruptcies took a fairly long time to resolve. 

Orange County was forced into bankruptcy because one of its investment funds bought complicated derivative securities which created large liabilities for the county when the market moved the wrong way. Orange County was able to get a Plan of Reorganization confirmed in a relatively short six months. However, it was almost an additional year before the county’s reorganization was fully effective.

Jefferson County’s problems arose because it borrowed too much money to upgrade its sewer system, and the upgrade did not produce enough revenue to service the debt. That bankruptcy case is still ongoing today, more than 20 months it was filed.

If we are correct about the Detroit bankruptcy taking a long time to resolve, the best opportunities will come many months down the road when bondholders lose patience and dump their holdings. Year-end may be a good time to look at the Detroit debt because many individual bondholders will be tempted to sell their bonds and take a tax loss on them. In the meantime, the Detroit bankruptcy is likely to produce plenty of interesting news to follow.

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Amazon = US GDP 1970

Amazon joined Apple in reaching a $1 trillion market capitalization. $1 trillion is about the same as the total value of New York City property and the total value of loans at JP Morgan, the nation’s largest bank in terms of assets. Jeff Bezos’ $160 billion stake would place him (personally) as the #33 largest company in the S&P 500 in terms of market cap, next to Coca-Cola, Disney and Netflix. We aren’t bold enough to predict whether the shares will continue upwards or if they are in a bubble reaching maximum inflation. Setting aside for a moment their investment prospects, let’s admire the truly remarkable milestone that these two companies have reached. Read More.

EV/EBITDA: What Is It & Why Are We Using It More?

In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple.  We thought it might be useful to describe this measure and why we like it.

Read More.

Turnaround Letter Stock Pick Named Top Performer of 2017

 

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What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."