Distressed Investing
AdvancedDistressed investing is buying the debt, shares or assets of companies in financial difficulty, such as those near or in bankruptcy, at low prices, with the aim of profiting from their recovery or restructuring.
When a company struggles, its bonds and loans often trade far below face value, and its shares may collapse. Distressed investors, often specialist hedge funds and private equity firms, buy these securities believing they are worth more than their price.
Strategies vary. Some investors buy debt cheaply and hope to be repaid more than they paid. Others buy debt expecting to convert it into ownership of the company through a restructuring, called loan-to-own. Some take an active role in negotiations, while others invest passively.
For example, a distressed investor might buy a company's bonds at 40 per 100 of face value. If the company restructures and bondholders recover 70, the investor earns a large return.
Distressed investing requires deep expertise in legal processes, credit analysis and valuation, since outcomes depend heavily on bankruptcy rules and negotiations among creditors. Risks are high: recovery may be much lower than expected, and processes can take years. Critics argue some distressed investors pursue aggressive tactics, though they also provide liquidity to sellers.
For worked examples and full lessons, visit notesbysara.org.