Research Note On Distressed Debt

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Research Note on Distressed Debt Distressed securities are securities of companies or government that are experiencing distress (either in financial or operational terms), default, or even bankruptcy. In case of debt, this is called distressed debt. Investing in distressed debt can result in big returns, but the downside is that when a company goes completely bankrupt, the value of your securities can go to zero. Distressed debt sells at a very low percentage of par value, for example 30 cents on the dollar. This percentage indicates that you can buy debt that is worth 1$ at maturity for 30 cents, which seems very attractive but there is of course a reason that it is only worth 30 cents on the dollar. If the distressed company emerges as…show more content…
This limits the scope of potential investors to sophisticated individual investors, hedge funds, private equity firms, vulture funds, and certain investment banks. The majority of distressed debt is bought by these institutional investors because they have the resources, expertise, and sophisticated risk management systems to assess the risk of these debt securities. There are various ways investors can invest in distressed debt. The easiest way is to buy the distressed debt in the bond market. Because most mutual funds are not allowed to invest in distressed debt, there is ample supply of debt available shortly after a firm defaults. The second way is to buy distressed debt directly from a mutual fund, since they have to sell according to their mandate. These transactions are generally limited to institutional investors since large quantities of debt, and therefore large quantities of cash, exchange hands. The third and final options is to buy directly into the distressed firm. This involves working directly with the company to extend its credit, either in the form of bonds or a revolving line of credit. Distressed companies usually need significant amounts of cash for a turnaround, so it is common for a consortium of investment banks and hedge funds to provide this cash to avoid overexposure to one

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