Distressed debt investing.
In plain English
Distressed debt investing buys claims against a troubled company, purchasing bonds or loans at a price that already assumes the borrower will default or restructure. When default looks likely, the original lenders and bond funds often have to sell, and the debt trades far below face value. A distressed buyer analyzes what the assets would fetch in a reorganization or liquidation and where its claim sits in the priority line. Some buyers want the cash recovery. Others buy the class of debt likely to convert into equity, which turns creditors into owners of the reorganized company. Outcomes get decided in bankruptcy court and through negotiation, not by the market.
01Why it matters
Recovery depends almost entirely on seniority and collateral, so two claims against the same failing company can pay back very differently, and the junior one can pay nothing at all.
02The math, step by step
A senior secured bond trades at 62 cents on the dollar. If the reorganization pays 85 cents, the gain is 23 cents on 62 invested, about 37 percent. If it pays 40 cents, the loss is roughly 35 percent.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
High-yield bonds are rated below investment grade, but their issuers are generally still paying on time. Distressed debt trades at prices that assume default or restructuring is already underway. One is compensated risk on a functioning borrower, the other is a claim inside a workout.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice