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distressed debt investment & finance definition
Debt with low junk status and a market price substantially below par value, often pennies on the dollar. Investors sometimes buy distressed debt on the possibility that management can renegotiate loan agreements and keep the issuer out of bankruptcy. Alternatively, distressed debt may offer potential value in the event the issuer is liquidated.
Case Study In December 2001 communications network services company Global Crossing, Ltd., was on the ropes. With reports of shrinking liquidity and an increased likelihood of seeking bankruptcy protection, the firm's stock dropped to under a dollar a share in trading on the New York Stock Exchange. At the same time its distressed 8.7% notes with 2007 maturity were bid at 7¢ on the dollar. At this price the notes provided buyers with a yield to maturity of nearly 100%. Three months earlier the same debt traded for over 50¢ on the dollar. The debt sold at such a low price because of the company's poor operating results and lack of cash, and also because investors believed the firm's telecom assets would bring little in liquidation.
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