Look I’m not an equity guy or a credit guy, but these passages, from latest @matt_levine newsletter, strike me as kind of obviously wrong.pic.twitter.com/RaaoXuC36b
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Similarly while it’s true that distressed debt investors are more focused on the downside I don’t think that’s a difference in temperament. Rather it’s a rational response to the potential outcomes.
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If you’re buying debt at 40 cents the absolute best you can do is a 150% return and the worst is you lose everything. If you buy equity you can still lose everything, but your upside is unlimited (or at least, limited at a much bigger number than 150%)
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So of course equity investors are more focused on the upside —that’s where most of the value from holding the equity is! Bond holders stop caring about the upside as soon as there’s enough money to repay the debt because that’s where they stop participating.
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I’m not saying anything profound here, and there is zero shade thrown at Matt Levine, who continues to be the single best newsletter writer in the world, just thought this was neat to think about.
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End of conversation
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