OVERVIEW

A common element of virtually all investments, distressed or otherwise, is that at some point they need to be returned to cash. Clients give investment managers cash to manage with the expectation that at some point they will receive cash back. The nature of the investment strategy and the evolution of market events will dictate the appropriate time and method to close out or conclude those investments. If it is an investment premised on a short-term market misvaluation, then the point at which the market appropriately adjusts may be the correct time to close out the investment. Depending on the volatility and responsiveness of the markets, the investment could be a day, a week, a month, or longer. In most of these strategies, the investment will come to a close by selling the identical security that was purchased but hopefully at a price that results in the investor making a profit. Bonds, unlike stocks, have a finite life, and thus another possible outcome is that a bond matures or is optionally redeemed (i.e., called by the issuer) or mandatorily redeemed (i.e., put by the investor). In these cases, the investor simply has his or her principal returned, potentially with a premium. This is essentially the same as selling at 100 ^[1] and thus presumably is profitable if the security was purchased at a discount.

In many distressed debt investment scenarios, however, the strategy may be to hold the debt investment through the completion of a restructuring and...