The Anatomy of Distressed Debt Markets

By Edward I. Altman (New York University) & Robert Benhenni (Pole Universitaire Leonard de Vinci)

The market for investing in distressed securities, the so-called “vulture” markets, has captured the interest of increasing numbers of investors and analysts. These investors, sometimes categorized as “alternative asset” institutions, mainly hedge funds, now can convincingly argue that the market has matured into a genuine asset class, with a reasonably long history of data on return and risk attributes.

In earlier works, Professor Altman has helped to classify this market into two distinct categories: (1) “Distressed” debt, meaning bonds or loans whose yield to maturity (later amended to option-adjusted yield) was equal to or greater than 10% above the 10-year U.S. government bond rate (later amended to be the U.S. government bonds with comparable duration), and (2) “Defaulted” debt, referring to bonds or loans of firms who have defaulted on their debt obligations and were in their restructuring (usually Chapter 11) phase.

The purpose of this article is to document the descriptive anatomy of the distressed debt markets size, growth, major strategies, characteristics, and participants, and then to explore its performance attributes, reviewing the relevant 30-year period from 1987-2017.  The article notes a number of unique aspects which make this asset class attractive, especially to hedge fund managers who can move in and out of the securities depending upon the credit cycle.

The article is available here.