Editing Distressed securities (section)

{{Short description|Tradable investment whose subject is in distress, default, or bankruptcy}}

In [[corporate finance]], '''distressed securities''' are [[security (finance)|securities]] over companies or government entities that are experiencing [[Financial distress|financial]] or operational distress, [[Default (finance)|default]], or are under [[bankruptcy]].{{Sfn|Ineichen|2002|page=270}} As far as debt securities, this is called '''distressed debt'''. Purchasing or holding such distressed-debt creates significant [[Financial risk|risk]] due to the possibility that bankruptcy may render such securities worthless (zero recovery).{{Sfn|Barclay Hedge|2013}}

The deliberate investment in distressed securities as a strategy, while potentially lucrative, has a significant level of risk as the securities may become worthless.  To do so requires significant levels of resources and expertise to analyze each investment, the related [[going concern]] risk and assess its position in an issuer's [[capital structure]] along with the likelihood of ultimate recovery.<ref>Lemke, Lins, Hoenig & Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance,'' §1:2 (Thomson West, 2014 ed.).</ref>  Distressed securities tend to trade at substantial discounts to their intrinsic or [[par value]]{{Sfn|Ineichen|2002|page=270}} and are therefore considered to be below investment grade.{{Sfn|Ineichen|2002|page=270}}  This usually limits the number of potential investors to large institutional investors—such as [[hedge fund]]s, [[private equity]] firms, [[investment bank]]s, and specialist [[investment firm]]s such as [[vulture fund]]s.{{Sfn|Barclay Hedge|2013}}

In 2012, [[Edward Altman]], a professor emeritus at the [[New York University Stern School of Business|NYU Stern School of Business]], and an expert on bankruptcy theory, estimated that there were "more than 200 financial institutions investing between $350–400 billion in the distressed debt market in the United States".{{Sfn|Altman|2012}}