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Investing in Distressed Securities
Investing in distressed securities means purchasing the equity and fixed income securities of companies that are either in bankruptcy or have a meaningful likelihood of filing for bankruptcy in the near future. These companies have claims against them that are greater than the value of their assets. More concretely, distressed companies don’t have the cash flow to service their debts.
Critical to the definition of “distressed”: these companies are fighting the clock--if operating results don’t improve soon or if their debts are not renegotiated, a bankruptcy will likely result. Their survival, in essence, is on the line.
Distressed investing usually involves greater risk than turnaround investing, but can also offer higher returns. Given the risk, most investors in distressed securities focus on bonds. These securities can provide greater downside protection than equities, as they may have legal claims on valuable assets and may receive new securities or cash in a bankruptcy reorganization; however, they still can provide significant upside potential, as gains of 100 to 200% are not uncommon. Get all the details you need to integrate distressed securities into your diversified portfolio with George Putnam's free e-report: Distressed Investing: Exploring Profit Potential.