What is distressed debt?

1. Distressed debt refers to bonds or debt of any company that is either bankrupt or on the verge of it.

2. Distressed debt can be purchased at a steep discount as there is risk of them becoming worthless.

3. When an investor like a hedge fund purchases a company’s distressed debt, they will often end up with some control of the business.


4. If the company turns around, the debt will not be distressed and will be valued at a considerably higher price, generating high returns.

5. It is a part of the high-yield loan market and is rated below investment grade debt.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)