Martin Whitman’s Comments: Third Avenue Shareholder Letter

marty whitman photoThe latest from Marty Whitman’s Third Avenue Shareholder Letter:
There are four specialized areas where a distress investor
ought to be reasonably knowledgeable, say knowledgeable
enough to be an informed, intelligent client:
• Securities Law and Regulation
• Financial Accounting
• Income Tax Law and Regulation
• Bankruptcy Law
Distress Investing divides into five separate, but sometimes related, businesses.
1) Performing loans, where the great weight of probability is that the credit instruments will remain performing loans.
2) Small reorganization or liquidation cases, where the probabilities are that little or no values will be left for unsecured and under-secured (to the extent of the shortfall) pre-petition creditors, unless the reorganization or liquidation takes place in short order either out of court or in a pre-pack or pre planned Chapter 11 – say 2 or 3 months.
3) Large cases where, during the pendency of the case, the cash generated from not making cash payments to certain creditors, plus cash profits plus cash proceeds from asset sales, equals or exceeds the cash drain arising out of the administrative expenses which are payable in cash plus cash losses attributable to operating difficulties.
Time in reorganization proceedings here is less important than for small cases, especially if the creditor class is to become entitled to post-petition interest payments.
4) Section 363 sales of assets by a debtor.
5) Capital infusions into troubled companies.
The theoretical goal of a corporate Chapter 11 case is to rehabilitatate a troubled debtor within the context of maximizing present values for creditors in accordance with a rule of absolute priority where no pre-petition creditor of a given class is given priority over other creditors in the same class. There are many exceptions in Chapter 11 to treating all pre-petition creditors of a class the same. Such exceptions include the following:
• Convenience class
• Asbestos claimants
• Certain trade creditors
• Certain landlords
• Utilities
• Taxes
• Certain liens
• Certain employee compensation
• Creditors with set-off rights
Below is the full document in scribd:
Third Avenue Shareholder Letter q2 2011

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