Distressed Debt

 

 

Distressed debt or securities are issues of companies that are on the verge of a financial breakdown or have already filed for bankruptcy protection. For issuers, distressed debt offers a chance to reorganize and resurface from the turmoil, whereas for lenders or investors, these securities mean an upper hand in the re-organization of the issuing company.[br]

 

The good news is that investors of distressed debt are the first to get remitted if the issuers go bankrupt. Therefore, distressed debt not only diversifies the portfolio but does so with minimal risk.

 

Distressed Debt: A Hedging Boon

Although the conventional school of thought may deter individuals or financial firms from speculative investment, the modern approach is to make hay when the sun shines. And with no apparent risk of losing investments, distressed debt has become the favorite term for hedge fund managers.

 

While distressed debts carry credit ratings of CCC or below, they usually yield between 600-800 points. For hedge fund managers, this translates into a potent opportunity. In fact, this explains the rush to the distressed debt market, where the original holders have become the best providers of these securities to hedge funds.

 

Besides hedge funds, distressed debt has found buyers in mutual funds, private equity firms and brokerage firms.

 

Hedge funds follow the simple strategy of investing a smaller proportion in distressed debt as compared to their total investments. As distressed debt can turn around to being extremely lucrative, as low as 1% of the total hedge fund can help funds earn, with a slight rise from 20 cents on a dollar to 80 cents, a whopping 300% return on their investment.

Investing In Distressed Debt: Considerations 

The same attribute of high profits without huge risk is what attracts individual investors to the world of distressed debt as well. However, before investing in any distressed security, it is crucial that the individual takes the following approach:[br] 

• Research and identify the right distressed debt to invest in. This includes checking the credit ratings and financial history of the organization or even their style of operations. 

• Once a distressed debt is identified, try to find the best way of accessing it. Exchange traded funds or hedge funds may be considered. 

While investing in distressed debt, individuals must focus on the benefits of a restructuring process on the securities they wish to invest in.