TLDR:
Distressed debt refers to securities of companies that are in financial difficulty, near bankruptcy, or have defaulted on obligations, often traded at significant discounts as speculative investments.
Distressed Debt as an Investment Strategy
Investing in distressed debt requires specialized expertise because value creation depends on navigating complex restructuring processes, understanding priority claims in bankruptcy, and often taking active roles in reorganizing the company. Distressed debt investors typically purchase bonds or loans at deep discounts — sometimes cents on the dollar — and profit either from the company’s recovery and debt repayment, or from receiving equity in exchange for debt forgiveness in a restructuring.