How does distressed debt investing work?

Could someone break down distressed debt investing? Are you investing in a company's bond that they issue? And is your thesis just if the company is performing poorly (and may need to restructure soon), but you think the company is somewhat undervalued? I'm not sure I completely understand it. Is there any other helpful resources to learn about DD? Thank you in advance

 

I’m not in distressed debt but this is my understanding:

Bad things happen to a company’s credit profile that causes its’ bond prices to fall. Although the company has a poor rating, DD investors will purchase the bonds that have a distressed price and will wait for that company to pay the rest of the coupons + the principle amount of debt. Academically spoken: it’s “Risk appearance arbitrage” basically making money when they market discounts bond prices too much

 

Yeah man! I think there’s an opportunity there for distressed debt in CRE bonds, specifically those that are focused in industrial companies that are most likely going to pay their debts back. Gotta be careful on which ones to buy tho.

 

There’s an number of ways to make money on distressed debt. From loan to own (debt for equity swap) to simply buying mispriced bonds, to taking a controlling position in a group of bonds to influence restructuring to your advantage and selling them off post-restructuring. Waiting for a principal payment for a distressed bond like the other user said is likely not going to happen considering bonds are low in the capital structure and typically will enter a restructuring due to missing a principal payment or voluntarily entering a in court restructuring due to understanding that they will miss one if something is not fixed.

 
NostradamusMan

There's an number of ways to make money on distressed debt. From loan to own (debt for equity swap) to simply buying mispriced bonds, to taking a controlling position in a group of bonds to influence restructuring to your advantage and selling them off post-restructuring. Waiting for a principal payment for a distressed bond like the other user said is likely not going to happen considering bonds are low in the capital structure and typically will enter a restructuring due to missing a principal payment or voluntarily entering a in court restructuring due to understanding that they will miss one if something is not fixed.

Investment firms are moving away from loan to down type of deals 

 

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