Companies Recovering From COVID-Induced Distress Offer Promise

Companies Recovering From COVID-Induced Distress Offer Promise

Share to Linkedin Recent financial headlines have touted several stories outlining how the amount of distressed debt has dropped precipitously, from $1 TN last March to under $100 BN today. That news might lead some investors to conclude that opportunities in distressed securities investing have dried up. However, while buying distressed debt for pennies on the dollar can be a winning strategy, there are numerous other attractive opportunities for investors in distressed companies before, during, and even after bankruptcy. One such lesser-known strategy is to short sell the common stock of a company heading into trouble. In most cases, shareholders of firms that take a trip through bankruptcy court receive little or no recovery. Examples of this can be seen in several recent high-profile cases, like Chesapeake Energy, Whiting Petroleum, and Ultra Petroleum. While not without risk and definitely not for retail investors, short selling stocks of companies facing bankruptcy can provide potentially attractive event-driven returns. Later, at the height of the company's distress and while it is operating under court supervision, the more typical distressed investment strategy is to purchase distressed debt. Purchasing the fulcrum debt security, which is the one most likely to be equitized, often presents the