What causes financial distress?
Debt instruments (such as loans and bonds) that are in high danger of not being repaid are typically called “distressed”. Seeing a high chance of bankruptcy, investors are only willing to pay a fraction of par-value for these instruments, pushing the yields up, to spreads that are often above 1000 basis points. A company in distress cannot (or doesn’t intend to) service is debt. In most cases, the number one problem is that the company is running out of cash, which is typically due to either operational cash burn or to a fragile capital structure. In the current environment, capital structure issues are the recurring element in distress stories. A typical example of a fragile capital structure is one which is exposed to refinancing risk. As debt approaches its repayment date, existing lenders become reluctant to roll over the debt at existing amounts or under current terms, and new lenders are even less compelled to lend. Therefore, existing lenders start analysing whether recovery wou
