Legal Considerations for Distressed Debt Investors

A sudden downturn in the economy can present a compelling opportunity for distressed debt investors looking to deploy liquidity with the prospect of a disproportionate return. Investing in troubled debt can take many forms, but choosing the right strategy and the right companies to invest in can pay off. This article highlights some key legal issues for potential investors who are considering acquiring debt from distressed companies.

What is troubled debt?

Distressed debt is debt (whether in the form of loans, notes, or bonds) that trades at a significant discount to its face value, possibly because the prospect of collecting the face amount of the debt. debt is uncertain to some extent. Investment in distressed debt can take the form of either such existing debt or new debt investment in a distressed company. A significant number of distressed debt opportunities consist of existing debt obligations for which the company is too leveraged and the cash flow insufficient to service the debt or the fair market value of the assets of the company is insufficient to cover all existing tranches of secured debt. In the case of new money investments, the investments usually take the form of loans or bonds intended to help these businesses with their options of potential foreclosure, bankruptcy, or private reorganization.

Why invest in troubled debt?

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Carol M. Barragan

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