Distressed Debt

Definition of 'Distressed Debt'

Corporate bonds of companies that have either filed for bankruptcy or appear likely to do so in the near future. The strategy of distressed debt firms involves first becoming a major creditor of the target company by snapping up the companys bonds at a low price.

This gives them the leverage they need to call most of the shots during either the reorganisation or the liquidation of the company. In the event of a liquidation, distressed debt firms, by standing ahead of the equity holders in line to be repaid, often recover all of their money, if not a healthy return on their investment.

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