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Prof. Ed Altman Testifies for the American Bankruptcy Institute’s Hearings on Bankruptcy Reform

By Edward Altman, Max L. Heine Professor of Finance

edward altman opinion article

... capital markets, and distressed investors in particular, positively impact the US bankruptcy reorganization process.

Altman Gives Testimony on 10/17/12 at the American Bankruptcy Institute’s Hearings on Bankruptcy Code Reform

Edward Altman, the Max L. Heine Professor of Finance at NYU Stern and an esteemed bankruptcy scholar for nearly five decades, testified today at the Loan Syndications & Trading Association conference in New York City for the American Bankruptcy Institute’s Hearings on Reform of the Bankruptcy Code.

Altman’s opinion, based on his research and that of his colleagues, indicates that capital markets, and distressed investors in particular, positively impact the US bankruptcy reorganization process. In his testimony he cited the following:
  • More than 200 financial institutions currently invest between $350-400 billion in the US distressed debt market
  • The liquidity in this market provides incentives for distressed investors to attract capital and monetize troubled assets before bankruptcy filings
  • Over the last 20 years, hedge funds have played an increasing role in the Chapter 11 reorganization and post-reorganization process, serving as the most active investors in the distressed debt market from 1996-2007
  • Bank loan prices provide an even earlier warning than corporate bonds that a firm is likely to default, enabling creditors to monetize holdings before values decrease further
  • The prices of debt securities at the time of default are efficient predictors of future levels of recoveries and reorganization values
  • Vulture investors play a primary role in firm governance and reorganization, and improve post-restructuring performance if they become CEO or Chairman
  • Altman shows significant excess returns of 28% for firms emerging from Chapter 11, noting that these firms outperform market expectations, thereby motivating distressed investors
Altman developed the Altman-Kuehne NYU Salomon Center Defaulted Bond and Defaulted Loan Indexes, one of the most well-known and respected benchmarks of these securities. These indexes go back to 1987 (bonds) and 1995 (loans), and he continues to maintain them. He and his colleagues are the only analysts providing statistics on the estimated size of the Defaulted and Distressed Debt Market from 1990-2012, with a market value totaling from $500 billion to close to $1 trillion each year for the past 12 years.