Define: Distressed Security

A distressed security is a financial asset, such as a bond, stock, or loan, that is experiencing financial difficulty or distress. This typically occurs when the issuer of the security is facing financial challenges, such as bankruptcy, default on debt obligations, or declining financial performance. Distressed securities are often traded at prices significantly below their intrinsic value, reflecting the uncertainty and risk associated with the issuer’s financial situation. Investors who specialise in distressed securities may seek to profit from these opportunities by purchasing the securities at distressed prices with the expectation of a potential turnaround or restructuring that could increase their value in the future. However, investing in distressed securities carries significant risks and requires careful analysis of the issuer’s financial condition and prospects for recovery.

A distressed security is a security belonging to a company that is under financial distress, such as bankruptcy, restructuring, liquidation, etc. in order to be able to pay debts (avoid insolvency). One strategy for dealing with a distressed security is to purchase the distressed security at a discount price and hold onto it until it has appreciated again in value. This investment strategy is considered risky because there is a chance that the company of the distressed security will not recover at all. Still, the potential profit from a distressed security makes it appealing to more aggressive investors. These profits may result from the market’s lack of understanding of the true value of the distressed security. A distressed security may also be known as a distressed asset.

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This glossary post was last updated: 29th March, 2024.