Distressed Debt
An event-driven credit strategy that invests in the debt of companies in or near bankruptcy — including bank loans, bonds, trade claims, and DIP financing — seeking gains from restructuring outcomes.
Details
- aliases: Distressed, Special Situations Credit
- category: credit
- investment thesis: Forced selling by yield-mandated holders, complex legal claims, and information asymmetry produce mispriced distressed securities; deep legal/operational expertise generates outsized returns through restructurings.
- edge source: Bankruptcy law expertise, capital-structure analysis, ability to lead creditor committees, and operational restructuring skills.
- typical holding period: 12-36 months
- drawdown profile: Returns clustered around credit cycles; deep drawdowns in early-cycle de-ratings, recoveries during workouts.
- correlation to equities: 0.4
- correlation to bonds: 0.3
- liquidity profile: annual
- instruments used: bank loans, high-yield bonds, trade claims, equity recoveries, DIP loans
- asset classes: credit
- primary risks: legal/process risk, valuation risk on illiquids, credit cycle timing, redemption gates needed
- key metrics: IRR, MOIC, recovery rates, duration of holdings
- notable practitioners: Howard Marks (Oaktree), Bruce Karsh, Marc Lasry (Avenue Capital), Apollo Distressed
- exemplar funds: oaktree, avenue-capital, elliott-management
- related terms: chapter-11, DIP-financing, fulcrum-security, loan-to-own, covenant
- related strategies: event-driven, private-credit
- academic foundations: Altman Z-score, Merton structural credit model, Hotchkiss-Mooradian (1997)