Distressed credit funds that invest in bank loans and trade claims should acknowledge lessons from the past financial crisis of 2008. While new problems require new solutions, distressed credit funds can arm themselves in the interim with lessons from the past.
There is one obvious similarity of the credit crisis of 2008 and the economic crisis today: markets collapsed. In 2008, the implosion of the housing market affected the credit markets just as the corona virus swiftly affected our economy with stay at home orders and closures of non-essential businesses. The two different affects similarly dislocated market valuations. Credits that were trading at par, at or near 100 cents on the dollar, are now trading distressed, or below 80 cents on the dollar (even though there isn’t a specific line of demarcation at which the trading convention moves from par to distressed). Just like musical chairs, the music stops and creditors that hold par paper may be required to sell loans on distressed trading documents. This happened in 2008 and is happening again today.
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