In simple terms, Distressed Debt Trading involves investing or trading the debt obligations of a company, at a distressed level in anticipation of reselling those stocks at a higher market valuation, for a short period of time. These distressed debts are bought with the view that they have been mispriced and will rebound in value. Distressed debts are a part of a high yield loan market.
Distressed debts are not generally issued by an entity. They are issued only by those companies which are facing financial distress. When a company is facing financial distress, the shareholders of such a company may sell their shares to a third party at a discounted price. These buyers invest in such shares and hold them until the company restructures its debts and then sells them at a higher market price.
The securities of a company are said to be distressed when the company is not able to meet its debt obligations. The policy behind investing in such companies' debts is that it works on the principle of high risk/ high return debt security. These debt securities are bought by the buyers at a lower par value, as they have the potential for higher returns.
When a company issues such debts, it is an indication of corporate restructuring. In time, when corporate restructuring is successful, these debt securities are repaid fully. Even, if the company becomes insolvent, these investors who invest in distressed debts of the companies are given high priority by the courts when it comes to writing off the debts of the company.
Each time an investor buys such bonds or securities; there is a risk of the borrower defaulting. With distressed debt investing, this risk is very high. Therefore, before investing in such securities a detailed risk analysis must be done. This needs a complete understanding of bankruptcies, reorganization, and restructuring. The potential growth of such financially distressed companies needs to be taken into account in order to predict the future growth of the company. Advice should be taken from a professional credit research platform that has well-qualified analysts.
In India, the market for distressed securities has been created recently by SEBI. SEBI has allowed a new framework that enables the trading of distressed debts in the market. This move of SEBI has been done with a motive of providing the bondholders such as mutual funds who have lesser legal remedies to recover the assets which have gone bad.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.