As a consequence, a securities market of problem firms can develop that affords opportunities if their problems are resolved and if current prices are over discounted. Upswings in distressed debt opportunities occasionally arise from the combination of lowered credit standards and the making of imprudent loans, and the subsequent onset of economic weakness or some other causative factor. The hope is to increase the value of the company by restoring it to financial viability through a financial restructuring – either in or outside of bankruptcy – and to capture both the discount at which the debt was bought and the amount by which the value of the company was increased.
Rather, investors purchase distressed debt in order to obtain a creditor claim on company assets. In these situations, debt instruments may trade at discounts to the estimated risk-adjusted value of those assets. Because the companies are almost certain to require financial restructurings, investments are not motivated by the expectation that the promised payments will be received. Debt instruments promise interest and the repayment of principal, but when a company becomes distressed those promises become overwhelmingly likely to be broken. The typical distressed debt situation involves an over-leveraged company that is thought likely to default on payment of interest and principal. Depending on an asset manager’s style, investments in distressed debt may be made in a wide range of instruments, including publicly issued bonds and notes bank debt privately issued debt, often syndicated trade credit leases preferred stock and warrants. The debt of such companies often trades at discounts to face value and/or intrinsic value which are substantial. Marks / Daniel von Rothenburgĭistressed debt investing generally refers to the purchase of public debt securities and private indebtedness of companies that market participants believe will be unable to service their debt and thus either have entered into default, bankruptcy or financial restructuring or are considered likely to do so in the future.