The world of distressed debt investing is unforgiving. Investors specifically seek out companies that are performing poorly or are on the brink of 澳洲幸运5官方开奖结果体彩网:bankruptcy then they buy up the bonds and take control.

There are always companies in the market that look terrible but are likely to get back on the right track. The first instinct for the regular investor is to invest in a financially distressed company's shares but the debt and bonds of these firms are often a much more attractive investment. Buying up large chunks of debt can cost millions of dollars but there are ways for little guys to cash in, too.

Buying Into Weak Companies

Distressed debt investing entails buying the bonds of firms that have already filed for bankruptcy or are likely to do so. Companies that have taken on too much debt are often prime targets. The aim is to become a creditor of the company by purchasing its bonds at a low price. This gives the buyer considerable power during either a reorganization or 澳洲幸运5官方开奖结果体彩网:liquidation of the company, giving them a significant say in what happens to the company.

The Vultures Are Circling

Funds known as "澳洲幸运5官方开奖结果体彩网:vulture funds" specialize entirely in distressed debt. They often focus on 澳洲幸运5官方开奖结果体彩网:government debt or public debt rather than that of comp🌌anies. These funds are very controversial and are often hated by the governments or public bodies in question.

Many 澳洲幸运5官方开奖结果体彩网:hedge funds also use distressed debt but differently from other investors. Hedge funds focus on purchasing liquid 澳洲幸运5官方开奖结果体彩网:debt securities that they can sell at a profit in the short run. 澳洲幸运5官方开奖结果体彩网:Private equity invest☂ors are interested in comꦜpanies that need restructuring or are about to go bankrupt.

Risk and the Nature of the Game

Owners of debt have priority over equity holders in the event of liquidation so it's better to invest in the debt of a distressed company than in its stock.

The philosophy behind distressed investments is simple: There's generally an expectation that the targeted company can and will be restructured successfully or brought back to life through a merger, a takeover, or some form of managerial re-engineering and rejuvenation. The asset values must substantially exceed the 澳洲幸运5官方开奖结果体彩网:market valuation if it comes to bankruptcy.

These investments are risky by their very nature but they have one significant advantage like many other intrinsically high-risk investments: the lack of correlation with other stock 澳洲幸运5官方开奖结果体彩网:market risks. This lack of correlation means that distressed debt can be a fine way to 澳洲幸运5官方开奖结果体彩网:diversify.

Identifying Sick and Dying Companies

The basic goal is to buy assets for a price well below their intrinsic or 澳洲幸运5官方开奖结果体彩网:fair values. This is where a scavenger's keen senses come into play. The "vultures" must look carefully and meticulously at distressed companies to detect oversold securities or even specific kinds of acco🐈unting problems.

They track industries and corporations that are on the brink of collapse or that have already gone under. There may be an opportunity if the bonds of a company are trading well below what they seem to be worth. M&A activity and ඣcredit negotiations are also analyzed to find bargains.

Intelligence and information from various sources are combined with top-level legal and financial skills to identify money-making pote🤡ntial. What matters fundamentally is that the assets are undervalued an🅺d can be purchased at a significant discount but everyone wants a bargain so coming out ahead takes skill.

Famous Examples of Vulture Investors

Self-described vulture Martin Whitman first got into distressed debt investing in the 1970s because big bond houses such as 澳洲幸运5官方开奖结果体彩网:Lehman Brothers considered it beneath their dignity to deal w♋ith bankrupt firms♋.

Whitman bought $14 million of debt and stock in Anglo Energy, an oil service firm that was struggling, in 1987. He then gained control of the company, put it into bankruptcy, and did a debt-for-equity deal with the other creditors. The company resurfaced from bankruptcy free of debt less than a year later and Whitman made a sizable gain.

A unit of Franklin Mutual Funds assisted in the saving of 澳洲幸运5官方开奖结果体彩网:Canary Wharf, the London office complex built by the Reichmann family, the Canadian real estate de💙velopers, in 1995. Lending banks gained control of the project after the developer's holding company went bankrupt. A group of investors that included Franklin's Mutual Series funds bought back the development from the banks.

The London property market recovered not long after and Canary Wharf listed on the 澳洲幸运5官方开奖结果体彩网:stock exchanges in 1999, providing large returns on Franklin's investment.

The Bottom Line

It's not particularly easy for private investors to get into distressed debt. The quickest way is to buy into a hedge fund that contains a prudent allocation of this debt but the minimum requirements of hedge funds make it impossible to invest in this manner for most investors. A few mutual funds and hedge funds are accessible to regular investors as well.

If the idea appeals to your more predatory instincts and you can access this market, bear in mind that this is a high-risk field. Risky but 澳洲幸运5官方开奖结果体彩网:lucrative is certainly the name of the game.

Disclosure: This article is not intended to provide investment advice. Investing in securities entails varying degrees of risk and can result in partial or total loss of principal. The trading strategies discussed in this article are complex and should not be undertaken by novice investors. Readers seeking to engage in such trading strategies should seek extensive education on the topic.