Distressed Debt
Definition
Distressed debt is the debt of companies in or near default, trading at deep discounts to par. Common shorthand thresholds: bonds yielding roughly 1,000 bps or more over Treasuries, or debt trading well below par (loans in the low 80s or below), signal distress — conventions vary.
Investors buy distressed debt for two broad strategies: trading for price recovery, or "loan-to-own" — buying the fulcrum security at a discount to convert into control equity through a restructuring. Analysis centers on the claims waterfall, documentation (liens, guarantees, covenants), valuation of the reorganized business, and process dynamics.
Returns hinge on buying claims below their ultimate recovery value. Risks include extended timelines, litigation, priming and liability-management transactions that subordinate existing holders, and simply misjudging enterprise value.
Why interviewers ask
Restructuring and distressed-fund interviews ask how you would analyze a bond trading at 60 — the expected framework runs through capital structure, waterfall recoveries, the fulcrum, and catalysts. It also connects banking RX advisory to the investor side of the table.
Related terms
Interviews don't test definitions — they test recall under pressure.
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