distressed equity

In looking at the distressed-bond market today, Marty Fridson suggests: Fasten your seatbelts. It’s going to get very bumpy. But investors who remain rational will profit extravagantly from the foreseeable disconnect between value and price in the lower-quality end of the corporate bond market.

As distressed-debt analysts, we have to keep tabs on the developments with the bankruptcy code. Typically, our most likely case is that the bond issuer will manage to make all the required interest payments and repay the principal at maturity. But not always.

Many beaten-down bonds deserve to be beaten down and never to recover. A smaller number of issuers, also beaten down, do have the wherewithal to make good on their obligations and strengthen their balance sheets.

A noteworthy entrant to the distressed ranks is Xerox (XRX) – in the 1980s, the copier producer’s stock was one of the greatest performers ever, registering an astounding 4,500-fold gain in the 50 years through its all-time high on May 3, 1999. Xerox’s senior debt is now on the watchlist for downgrading.

Innovations of the past few decades have created many outstanding opportunities in distressed investing. To ease the pain of distress, financial entrepreneurs created new procedures to reduce the cost of fixing broken balance sheets – all to the benefit of individual investors.