What are distressed investments?

5th Dec 2009 by Amelia Timbers

Distressed investments are very much what they sound like; investments in distressed companies, or companies that may be at risk of bankruptcy, or that have declared bankruptcy and are in the process of restructuring. These may be companies whose bond rating fell significantly or whose cost of debt recently skyrocketed (meaning that banks and credit rating agencies see them as high risk). Relatedly, their share price may have plummeted, they likely missed earnings targets over a number of quarters and have probably been suffering negative press. In the 2008 financial crisis, banks whose investments went bad were called 'distressed', to give you a reference point. If an investor is confident that a stressed investment will come back, they may invest while they can get a rock bottom price. This is a strategy employed in private equity. Buy low, hope it comes back, and you won't have lost too much if it doesn't.

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com