The Capital Markets

CHAPTER 16Distressed Debt Securities

Michael McMaster

OVERVIEW OF DISTRESSED DEBT SECURITIES

Investing in distressed debt securities involves a more comprehensive analytical skill set than more traditional securities investing—like Treasuries, municipals, and investment‐grade corporate bonds. While traditional investments require an investor to understand market risk and credit risk, distressed debt investors require additional skills depending upon the distressed debt scenario. The distressed debt investor may need to be a little bit research analyst, bankruptcy lawyer, accountant, cash flow modeler, forecaster, asset evaluator, and gambler. In addition, patience and confidence in their valuation methodology are essential qualities for distressed securities investors.

While there is no established definition of distressed debt securities, these securities are generally debt securities issued by corporations, governments, or municipalities that are undergoing severe financial stress and either are currently in bankruptcy proceedings or are in need of financial support, restructuring of debt, a reorganization of the company, and/or relief, which may include a plan of reorganization under Chapter 11 or a plan of liquidation under Chapter 7 of the U.S. Bankruptcy Code.^1,2 Factors that may place the issuers under such financial stress may include, but are not limited to, the following:

• The issuer has experienced operational difficulties due to competition, loss of customers, declining ...