Compare
| Strategy | Approach | Return Driver |
|---|---|---|
| Trading | Buy at 40, sell at 60 when sentiment improves | Price recovery from overselling |
| Active restructuring | Buy enough debt to influence the Chapter 11 plan | Control the reorganization outcome |
| Loan-to-own | Buy fulcrum debt that converts to equity | Own the reorganized company at a deep discount |
| Liquidation | Buy secured debt at a discount to collateral value | Recovery exceeds purchase price |
Key point
The key metric is the recovery rate vs. purchase price, not the coupon. If you buy a bond at $0.40 and the company recovers to pay $0.65, that’s a 62.5% return regardless of what the coupon was.
Formula
Distressed Debt Return = (Recovery Value − Purchase Price) / Purchase Price
Try it
When a company files for bankruptcy, check the trading price of its bonds. Senior secured bonds trading at 60–80 cents often offer attractive risk-adjusted returns if the recovery analysis supports it.
Check-in
A company’s unsecured bonds trade at $0.30. Your analysis estimates recovery of $0.45 in restructuring. Is this attractive?
Key insight
Check-in
Distressed debt: a bond trades at 35¢ on the dollar. Recovery analysis suggests 40-50¢ in bankruptcy. Investment thesis?
Check your understanding
Sit with the ideas.
A company's senior secured bonds trade at 45 cents on the dollar. The company has $2B in total debt and $1.5B in estimated enterprise value. Senior secured debt is $800M. What is the approximate recovery for senior secured bondholders in a restructuring?
Why: