Distressed Securities Investing

Overview: A company teetering on bankruptcy does not sound like a great investment opportunity, but in many instances it can be -- for those who understand distressed securities investing. Distressed securities are stocks, bonds, and trade or financial claims of companies in, or about to enter or exit, bankruptcy or financial distress. The prices of these securities fall in anticipation of the financial distress when their holders choose to sell rather than remain invested in a financially troubled company. These sellers may be reacting emotionally to the stigma of current or potential bankruptcy, causing them to overlook or ignore the company’s true worth. The article states that the strategy is to capitalize on the knowledge, flexibility, and patience that a distressed securities fund manager has that the creditors of a company often do not have. Many institutional investors, like pension funds, are barred by their charters or regulators from buying or holding onto below investment -grade bonds (BBB or lower) – even if the company is a viable one. Therefore, they may sell at steeply discounted prices, which have the effect of lowering prices further. Again its stated that distressed securities investing has little stock market dependence or correlation to the performance of the stock market, succeeding or failing based on how effective the investor’s research has been in uncovering all of the variables specific to a distressed company.

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Format: HTML | Date: Jan 2003 | Pages: 1