The Art of Vulture Investing: Adventures in Distressed Securities Management

CHAPTER 7

Digesting the Remains

The Egyptian Vultures, though most horrid in their appearance, are welcomed by the inhabitants for their usefulness in devouring the carrion, which would otherwise fill the air with noxious exhalations.

–R.B. Seeley and W. Burnside, The Christian Ornithologist: A Description of Various British and Foreign Birds with Their Instincts and Habits

A vulture’s digestive tract is a wondrous thing. It is so acidic that it can break down and destroy practically anything, including most microbes and toxins. In the process, it helps prevent diseased carcasses from causing further harm to the environment.

Asbestos producers—or, in fact, companies involved in any form of mass tort litigation—present an analogous situation in the corporate world. They are often distressed, because their disease-causing or otherwise injurious products have led to potential or actual legal liabilities. Ordinarily their weakened state might make them a tempting tidbit, but those liabilities could prove lethal to any corporate predator that swallowed them up.

Vulture investors, however, look at this legal liability as just another form of leverage. As part of our normal credit analysis, we simply add a defendant company’s total expected cash liabilities from lawsuits to its other types of debt, taking into account the company’s ability to pay those judgments as they come due.

Moreover, ...