Distressed Debt

What is Distressed Debt?

Distressed Debt refers to securities which has made default, or under the process of bankruptcy, or facing situations which could lead to bankruptcy and are usually traded at large discounts in comparison to their par value. There is a great deal of risk involved in the purchase or sale of these securities as financial distress or bankruptcy may lead to these securities becoming worthless or zero.

Explanation

Distressed Debt

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Features of Distressed Debt

How Does it Work?

Examples

Types

  • Distress debt investments where investors are buying debts at significant discounts and looking to earn substantial profit in case the table turns around.
  • An investment where investors are looking to gain the control or ownership of the defaulted company through negotiation in courts if the company goes into bankruptcy.
  • An active non-control strategy where these investors involve themselves in the restructuring process of the company so that they can negotiate and maximize and safeguard the interest of the class of securities held by them.

Who Invests in Distressed Debt?

Advantages

Disadvantages

Important Points

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