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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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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I don't think your considering the fact that debt trading at 40 cents is likely going to be the fulcrum security and, thus, get equitized in a BK / restructuring. Things like super-priority roll-up DIPs for bondholders & post-BK equity valuation don't really "cap" bond returns.
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I know some bad ass distressed folks and they tend to be way more optimistic than your average debt guy. They are wired to see value in a pile of shi%*t. They also suffer from selection bias because there are simply not that many deals that come their way.
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