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How can one lose money investing in distressed debt?


LongHaul
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How can one lose money investing in distressed debt excluding being wrong on the value of the business?

 

For example, if you buy sub bonds and think the company is worth X and the senior secured lenders convince the judge it is worth

.5X (real value is still 1x though) and the senior secured take all the equity in the company, you could lose a lot of money.

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You buy notes and the company issues second lien or secured above you.

 

You buy notes, company goes BK and most of the new equity goes to DIP.

 

Interesting one: you buy notes, company goes BK and the common holders get a better deal than you (see Swift Energy).

 

You are not institutional investor and you can't participate in DIP, conversions to secured, etc.

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