Distressed debt refers to bonds, loans, or other debt instruments of financially distressed companies — typically trading at significant discounts to face value — and the investment strategies built around them.
At CRAGSI, we define distressed debt as the bonds, loans, trade claims, and other fixed-income instruments issued by companies that are in, or approaching, financial distress or default — and that are therefore trading at significant discounts to their face value. Distressed debt investing is the discipline of purchasing these instruments at discounted prices and profiting from the difference between the purchase price and the ultimate recovery through a restructuring, reorganization, or liquidation.
A company's debt becomes "distressed" — typically defined as trading at a yield spread of more than 1,000 basis points above comparable Treasury securities, or at a price below 80 cents on the dollar — when the market believes meaningful default risk exists. Distressed debt is distinct from high-yield bonds, which are below-investment-grade but not in financial distress.
Distressed debt investors generally fall into two camps: "loan to own" investors who buy debt with the intention of taking control through the bankruptcy or restructuring process, and "trading" investors who buy distressed debt opportunistically and sell before or during a restructuring. The distinction matters enormously: loan-to-own strategies require deep restructuring expertise; trading strategies require rapid assessment of recovery value.
CRAGSI's founding team spent decades managing distressed debt portfolios at Pacholder Associates and J.P. Morgan Asset Management, across every market cycle from the S&L crisis to the post-COVID correction.
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