Distressed Securities

Distressed securities are financial instruments issued by a company that is near to or currently going through bankruptcy. A security can also be considered distressed it fails to maintain certain covenants (obligations incorporated into the debt or security, such the ability to maintain a certain asset to liability ratio, or a particular credit rating.) As a result of the issuing company’s inability to meet its financial obligations, these financial instruments have suffered a substantial reduction in value. However, because of their implicit riskiness, they can offer high-risk investors the potential for high returns. Distressed securities can include common and preferred shares, bank debt, trade claims, and corporate bonds.