Distressed and Defaulted Debt Securities: Market Dynamics and Investment Performance

Abstract

The market for investing in distressed and defaulted debt is continuing to receive a great deal of attention despite the shrinkage in the supply of new securities in 1993-1995 (first half). This is primarily due to the continued excellent return performance of defaulted bonds, the expected growth in the supply of new distressed and defaulted public and private debt paper, and the clearly documented relatively low correlation of returns with the more traditional debt and equity markets. This study reviews some of the important attributes of this unique investment vehicle and updates our analysis of the risk and return performance of the most extreme component of the distressed market – defaulted debt.