A sudden downturn in the economy may present an attractive opportunity for distressed debt investors looking to deploy cash with the prospect of an outsized return. Investing in distressed debt can take on many forms, but picking the right strategy and the right companies to invest in can yield successful results. This article highlights certain key legal issues for potential investors considering acquiring the debt of distressed companies.

What is distressed debt?

Distressed debt is debt (whether in the form of loans, notes, or bonds) trading at a significant discount to its par value likely because the prospect for recovering the par amount of the debt is uncertain to a degree. Investing in distressed debt may take the form of either acquiring such existing debt or making a new money debt investment in a distressed enterprise. A significant number of distressed debt opportunities are comprised of existing debt obligations where either the company is burdened with too much debt and insufficient cash flow to service the debt or the fair market value of the company’s assets is insufficient to cover all of the existing tranches of secured debt. In the case of new money investments, the investments generally take the form of loans or bonds intended to aid these companies facing their options of potential foreclosure, bankruptcy or private workout.

Why invest in distressed debt?

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