meaningful for the Fund when, as, and if, General Motors Senior Unsecureds sell at attractive prices. Third Avenue

acquired its small position at a dollar price of about 50% of claim and a yield to maturity of around 15%.

It seems odds on that General Motors (“GM”) has to reorganize if it is to solve its problems with burdensome legacy costs — pensions and health care; and also rationalize its wage, hour and working condition contracts with its principal union. There are two ways a distressed company can reorganize, i.e., restructure its obligations — voluntary exchanges, or Chapter 11 of the Bankruptcy Code.

Though not without business risks (who wants to buy a car from a bankrupt company?), a Chapter 11 case probably would be the easiest way for General Motors to solve its legacy cost and labor cost problems. In Chapter11, General Motors would likely be able to unload a large amount of pension obligations on the U.S. Government’s Pension Benefit Guaranty Corporation; and a bankruptcy court, relying on Section 1113 (e), might be able to impose new labor contracts on the United Automobile

Workers union.

There are two things that I am willing to bet on in a GM Chapter 11. First, General Motors is readily reorganizable given that it has so many profitable businesses world-wide; especially since many claimants,i.e., pensioners, workers and bondholders, would have to accept common stock, hopefully non-dividend paying, as partial, or full, compensation for their claims. Second,

GM is so large and important to the US economy, that heaven and high earth would be moved to preserve some

equity for the existing General Motors Common Stock.

In order to preserve any value for the existing General Motors Common Stock, General Motors Senior Unsecureds would have to be given 100% of their claim,without interest, in reorganization value; or, alternatively,General Motors would have to obtain the consent of two-thirds in amount, and 50% in number, of those voting of the General Motors Senior Unsecureds, in

order to consummate a Plan of Reorganization. Normally when a company attempts to reorganize via a voluntary exchange, such exchanges succeed because non-exchanging creditors are shown a lot of downside ifthey do not exchange their existing holdings for new securities. These new securities, invariably, do not require as much cash service as the credit instruments held and not exchanged, i.e., on the exchange, interest rates and/or principal amounts are reduced; and/or maturities are extended. The ways to show non-exchanging senior unsecured bondholders downside is to effectively

subordinate non-exchangers, either by giving the exchanging bondholders security and/or shortening

maturities. Neither of these downsides appear to be applicable to the General Motors Senior Unsecureds.

Each issue in which TAVF might be interested contains “equitable and ratable clauses.” That means that if any

new issue of General Motors obligations were to be secured, Senior Unsecureds would have to be secured

pro-rata with the new issue.

General Motors would be able to get rid of “equitable and ratable” clauses in a voluntary exchange if it could

obtain the consent of “not less than a majority in principal amount of the debt securities of all series at the

time outstanding under such Indenture...” In order to obtain consents, General Motors likely would have to

offer holders of General Motors Senior Unsecureds substantial premiums over market prices and/or

substantial fees probably payable in cash. Without “equitable and ratable” protection, TAVF might not be

interested in investing in General Motors Senior Unsecureds prior to a Chapter 11 filing.

A voluntary exchange that could be helpful to GM is one where claimants are offered the opportunity to exchange

all, or part, of their claim for General Motors Common Stock. The exchange ratio would have to be such that

claimants would receive a 10% - 20% premium over the present value, or market value, of their claim. If claimants

are reluctant to exchange, Wall Street’s arbitrage market would pay cash to many claimants, thus, assuring at least

partial success for a voluntary exchange.Exchanging claimants who do not cash out to thearbitrage market would, in effect, be sacrificing income and seniority for an immediate market premium and the possibility for long-term growth in the price of General Motors Common Stock. Non-exchanging claimants on the other hand would be credit enhanced.

Neither Chapter 11, nor a voluntary exchange, can do more than put General Motors on the road to recovery.

Success is not assured. Yet given the background just described, Third Avenue is prepared to be a big player in

General Motors Senior Unsecureds insofar as it can acquire such securities at prices around, say, 50% - 55%

October 31, 2002, where there appeared a piece, “An Introduction To Distress Investing”.

(Copyright 2002 by Martin J. Whitman)

Distress Investing is different from what most academic theorists and common stock investors are used to. Distress

Investing involves being a special sort of creditor. In contrast, Modern Capital Theory, or MCT, the principal academic

discipline, looks at investing from the point of view of either the outside passive minority investor in common

stocks or the common stockholder consolidated with the company itself. Both approaches clearly are irrelevant for

Distress Investing, though many MCT concepts are very helpful, e.g., an expanded view of the concept of Net Present

Value, or NPV.Most common stock investing involves trying to predict near-term market prices in most situations even where there are no reasonably determinate workouts. Weight to market is much more minimal in Distress Investing.

Most credit analysis revolves around trying to predict whether or not there will be a money default. Distress Investing

assumes that there will be a money default. Distress Investing analysis bottoms on figuring out “what happens next”,

that is, after a money default occurs. In Distress Investing, Chapter 11 is not an ending. Rather, it is a beginning.

I. 5 Basic Truths

II. How to Analyze

III. Feasibility from a Corporate Point of View

IV. Pricing Issues

V. Weight to Market—Think Like An Arbitrageur

VI. Tax Disadvantages in Particular and Political Disadvantages in General

VII. Form of Consideration vs. Amount of Consideration

I. 5 Basic Truths

1. Outside of a Court Proceeding, usually Chapter 11, no one can take away a creditor’s right to a money payment

for interest, principal or premium unless that individual creditor so consents. Ignorance of this basic

rule seemed evident in the airline bailout in the Fall of 2001, which, among other things, was approved by

a 96-to-1 vote in the U.S. Senate. Cash payments of $5 billion were made to the airlines, of which well over

$2 billion was used in the subsequent 12 months to pay cash interest on already outstanding airline indebtedness.

None of the funds dedicated to interest payments were used to enhance the efficiency or security of

airline operations. Put otherwise, the bailout seemed to be a bailout of airline creditors in great part, rather

than a bailout of the airlines.

2. In the reorganization of any publicly traded issuer, whether that reorganization takes place out-of-court or

in Chapter 11, the rules governing a Chapter 11 reorganization will influence heavily the actual reorganization

that eventually takes place. These rules include the “rule of absolute priority” and the “period of exclusivity”

during which the debtor is the only party who can propose a Plan of Reorganization.

3. John Burr Williams, an eminent economist, wrote in 1938, “Investment value is the present worth of the

future dividends in the case of a common stock, or of the future coupons or principal in the case of a bond.”

Williams had it wrong in terms of analyzing distressed situations. Here, investment value is the present worth

of a future “cash bailout”, whatever the source of that cash bailout.

A security gives a holder either rights to cash payments by a company or ownership rights in that company,

present or potential. For a security to have value, it has to have the promise of delivering a “Cash Bailout”

to a holder. “Cash Bailouts” come from three disparate sources:

a. Payments by the company, whether for interest, principal, premium, dividends or share repurchases.

b. Potential sale to some sort of a market, not just an Outside Passive Minority Investor, or OPMI, market

such as the New York Stock Exchange, but also other markets, such as takeover markets.

c. Control, or elements of control, of the company. Common stocks without economic value can sometimes

have a governance value.

4. The Creditors of a Distressed Company are going to be ripped off by investment bankers, lawyers and managements,

whether the reorganization or liquidation process takes place out-of-court, or in Chapter 11 or

Chapter 7. Unlike common stock investing for control, when a company is distressed, the company is likely

to pick up all the professional expenses for attorneys, investment bankers and appraisers incurred by dominant

creditors whether the company is reorganized in Chapter 11 or out-of-court, or whether the company

is liquidated under either Chapter 11 or Chapter 7.

5. A creditor has only contractual rights, not residual rights. Residual rights belong to owners, e.g., a duty of

directors for “fair dealing” in relationships with owners.

II. How to Analyze

Distress Investing analysis, whether for reorganization or liquidation of assets, is almost the same as for Leveraged

Buy-Outs (“LBO”) or Management Buy-Outs (“MBO”). First, one needs to determine a value for the enterprise

and its probable dynamics before looking at the cost of capital. To do this, forecast operating income, earnings

before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), and

the value of separable and saleable assets.

Second, to the above, apply an appropriate capitalization. In a LBO or MBO analysis, leverage up the capitalization;

in Distress Investing, leverage down the capitalization.

Access to new capital for distressed companies tends to be much, much easier in Chapter 11 than out-of-court.

Most distressed companies, but not all, need such access to new capital.

There are eight analytic differences between Distress Investing and LBO Investing:

1. In Distress Investing, it may be harder to analyze the business, especially pre-Chapter 11.

a. Frequently, there is no chance to undertake a due diligence investigation.

b. Companies are generally weaker.

c. There are fewer well-managed companies.

2. In Distress Investing, it may be harder for the security holder and the company to borrow funds, with the

exception that in Chapter 11, Debtor-in-Possession (“DIP”) financing is very safe and very attractive for

post-petition lenders.

3. In Distress Investing, reorganization risks, separate and apart from business risks, are always an important

consideration.

4. In Distress Investing, adequately secured lenders may receive adequate protection payments during the pendency

of a proceeding or the “indubitable equivalent” thereof.

5. In Distress Investing, a creditor is much less likely to be wiped out if things do not go well than is the case

for a LBO equity investor, especially a non-control investor.

6. In Distress Investing, securities laws may be considerably less onerous than is the case for owners of voting

securities, such as common stocks.

7. In Distress Investing, it frequently is not necessary to pay up versus OPMI market prices in order to establish

security positions that will allow the holder to have an influential voice in the reorganization. In LBOs

and MBOs, premiums over OPMI market prices almost always have to be paid.

8. In Distress Investing, it is much tougher to use the Internal Revenue Code advantageously than is the case

for LBOs and MBOs.

III. Feasibility

Look at reorganization from the company’s point of view. Try to reorganize so that the company will be sound

enough so that it doesn’t have to go through the reorganization process again.

In a reorganization, new considerations will be issued to creditors, and if anything remains, to owners, in accordance

with some semblance of the “rule of absolute priority”, i.e., where senior creditors get paid in full, or almost

in full, before junior creditors get anything. Insofar as the new consideration is issued in ownership interests rather

than in cash or cash-pay securities, feasibility is enhanced, with one notable exception. The exception to the feasibility

benefit from issuing equity rather than debt in a reorganization is that a reorganizing company ought to

pay out cash or issue cash-pay instruments in a reorganization insofar as such issuances enhance future access to

the capital markets or to the trade credit of the reorganized going concern. Most of the reorganizations where I

have been influential tend to be all equity reorganizations after secured debt, if any, is reinstated. Examples include

Nabors Industries, Danielson Holdings, Innovative Clinical Solutions and CareMatrix.

IV. Pricing Issues

The Debtor-in-Possession has the exclusive right to propose a Plan of Reorganization (“POR”) for 120 days, plus

an additional 60 days to solicit acceptances. Exclusivity has been routinely extended by bankruptcy courts.

In promulgating a POR, the DIP will have certain creditors reinstated and others will participate in the reorganization.

As a creditor, if you are to be reinstated, the basic calculation of return is yield-to-an-improved-creditrating

or Yield-to-Maturity (YTM). If you are to participate in a reorganization, the basic calculation of return is

long maturity securities.

The timing of workouts can be hard to predict as evidenced by the current asbestos-related Chapter 11 cases. The

importance of timing diminishes insofar as you are convinced that the workout will result in the principal amount

of claim plus post petition interest.

V. Weight To Market—Think Like An Arbitrageur

The Market for Distress Investing is less important than it is for common stock investing. It is hard to buy bottoms.

Distress Investing tends to be a bad business to finance on margin. In Risk Arbitrage as well as most Distress

Investing, there exist relatively determinate workouts in relatively determinate periods of time.

VI. Tax Disadvantages and Political Disadvantages

The distressed creditor seems to be a constituency without any political clout, either Democratic or Republican.

There has been a 20-year trend toward disadvantaging secondary creditors as evidenced by the creation of

Cancellation of Indebtedness Income (COD) for issuers, which results in a reduction of tax attributes for the

company, initially, but could in a few instances actually result in a tax payable; by the creation of Original Issue
Discount (OID) for holders of publicly traded credits, which results in the holders having to recognize phantom

taxable income; and the elimination of the Stock-for-Debt Exception for “hot and new creditors,” which limits

the ability of reorganized companies to utilize Net Operating Losses (NOLs).

VII. Form of Consideration vs. Amount of Consideration

Successful reorganization is not the end of the game. It can be a beginning. If a company is well capitalized, well

managed and in a promising industry, I prefer to take the consideration to which we are entitled in common

stock—unlike trade and/or banks.

page 3 here:
http://www.thirdavenuefunds.com/taf/documents/reports/aboutus-reports-02Q3.pdf

other examples here:
http://www.thirdavenuefunds.com/taf/aboutus-shareholder-letters.html
 
and how you can take a part in distressed investing ?

everything is here and for free :)
http://www.investinginbonds.com

choose corporate market and then type name of the company ,you will see charts , history types , you can use calculators on this site etc. The main information you need is CUSIP number.

Then register yourself (for free) on www.moodys.com type CUSIP and now you will see if it is secured or unsecured . That's important see above Martin Whitman's articles.

The other great source of information is: www.bankruptcydata.com  (free trial) , you can find companies that went bankrupt through chapter 7 and 11 etc.

Happy distressed investing to all stokblogers !

PS: These hedge funds are focused on distressed investing: