Distressed Debt Strategies

When a company cannot meet its financial obligations, including making making payments on its loans it is said to be in distress and its debt is called distressed debt. Companies in this situation are either in bankruptcy or considering bankruptcy. Depending on the reasons why the debt became distressed, investing in such companies can give you a handsome return.

Publicly Traded Companies

Through shares in hedge funds, vulture funds, mutual funds, or equity service companies, you can purchase an interest in the distressed debt of a company. These publicly traded funds buy the distressed debt of a soon to be, or already, bankrupt company. The fund you buy into now has influence over how the distressed company will restructure and become profitable again.

It is important that you research the distressed debt to determine the likelihood that, once the distressed company emerges from restructuring in bankruptcy, it can repay debt and return to profitability. There are many factors that can contribute to a company's going into distress. Natural disasters, economic conditions, legal issues, or poor management can contribute. In order for you to make financially sound decisions, you must personally research companies you are considering investing in. Input from your financial adviser can be enlightening and helpful, but in the end, you must make the decision.

Asset Value

When you are considering investing in distressed debt, you must investigate and analyse the value of the assets of the company. If the assets are strong, and the company has the potential to rebound and create value and growth, it is a good indicator that it will emerge from bankruptcy capable of making profits.

Management Issues

As you research a distressed debt company and the reasons it is in its present state, pay attention to how the company was managed, both in the past and present. Many times distressed debt is the result of poor management and underperformance. By investing in such companies, where the distressed debt is sold to a financial fund, you are more likely to receive a positive return from your investment. Management issues can be resolved and corrected during the restructuring.

Local

Occasionally, you may be able to invest in a local business that has distressed debt. This is often done with real estate foreclosures. Investigate the business and property before approaching the owners. Like investing in shares of distressed debt, you will need to know the true, or fair market value, of the assets of the business, the history, and the reasons the company fell into distress. Once you have invested in a local distressed debt venture, you can give input as to how the business restructures.