distressed debt

(redirected from Distressed Debts)

Distressed Debt

A debt security in an unprofitable company that is likely to go bankrupt. This is considered to be a high-risk security with the potential for high return because financial distress often precedes corporate restructuring, which could keep the company from bankruptcy, or at least liquidation, enabling the security to be repaid in full. On the other hand, the potential for default is very high. Distressed debt usually sells for a very small percentage of its par value.

distressed debt

Debt with low junk status and a market price substantially below par value, often pennies on the dollar. Investors sometimes buy distressed debt on the possibility that management can renegotiate loan agreements and keep the issuer out of bankruptcy. Alternatively, distressed debt may offer potential value in the event the issuer is liquidated.
Case Study In December 2001 communications network services company Global Crossing, Ltd., was on the ropes. With reports of shrinking liquidity and an increased likelihood of seeking bankruptcy protection, the firm's stock dropped to under a dollar a share in trading on the New York Stock Exchange. At the same time its distressed 8.7% notes with 2007 maturity were bid at 7¢ on the dollar. At this price the notes provided buyers with a yield to maturity of nearly 100%. Three months earlier the same debt traded for over 50¢ on the dollar. The debt sold at such a low price because of the company's poor operating results and lack of cash, and also because investors believed the firm's telecom assets would bring little in liquidation.
References in periodicals archive ?
I agree with prior commentary that application of the statutory market discount rules to distressed debts is an inappropriate policy, though relevant policy considerations do not all favor reform.
The statutory rules regarding the timing and character of income and losses on debt instruments overtax distressed debt investors.
The normal tax rules governing debt holders produce nonsensical results when applied to debt of borrowers that are in financial distress--so called "distressed debt." The most glaring problem is application of the market discount rules to return on distressed debt, which results in gains being taxed as interest, whereas losing bets on distressed debt are highly likely to be classified as capital losses.
The importance of tax rules governing distressed debt vary with the amount of distressed debt trading in the marketplace.
I should be explicit at the outset regarding the assumptions I make as to the scope of potential reforms to address the shortcomings in the present tax treatment of distressed debt. I will assume that the fundamental tax treatment of investment securities--including both stock and debt--remains as is, warts and all.
In Section II.A, I describe the statutory rules governing the taxation of market discount; in Section II.B, I explain and illustrate the problems that arise if these rules are applied to distressed debt. Section II.B is largely a summary of criticisms collected from prior commentary.
Were this correct, it might imply that the failure to include special exceptions for distressed debt in the statutory rules is a minor problem.
Under a definitional approach, "distressed debt" is defined and debt instruments meeting the definition are subject to special rules tailor-made for distressed debt, rules that correct the problems that arise when rules of general application are applied to distressed debt.
New York, NY, February 03, 2011 --(PR.com)-- The Knowledge Group/The Knowledge Congress Live Webcast Series, the leading producer of regulatory focused webcasts, announced today that it has scheduled a live webcast entitled New Rules for Distressed Debt: Boon or Bane?
The continuing economic turmoil may offer rare opportunities for investors and companies to acquire distressed debt at deep discounts.
Nugent, Partner, Cadwalader, Wickersham & Taft LLP will speak at the Knowledge Congress' webcast entitled: "New Rules for Distressed Debt: Boon or Bane?" This event is scheduled for February 25, 2011 from 3:00 PM to 5:00 PM (ET).
Tax professionals, finance executives and investors must have a comprehensive understanding of the issues when acquiring distressed debt such as tax, legal, audit and valuation.