Distressed debt companies

Corporate bonds of companies that have either filed for bankruptcy or appear likely to do so in the near future. The strategy of distressed debt companies involves first becoming a major creditor of the target company by snapping up the company´s bonds at pennies on the dollar. This gives them the leverage they need to call most of the shots during either the reorganization, or the liquidation, of the company. In the event of a liquidation, distressed debt companies, by standing ahead of the equity holders in the line to be repaid, often recover all of their money, if not a healthy return on their investment. Usually, however, the more desirable outcome a reorganization that allows the company to emerge from bankruptcy protection. As part of these reorganizations, distressed debt companies often forgive the debt obligations of the company, in return for enough equity in the company to compensate them.