Distressed credit or “distressed debt” is the debt owed by a business that is close to or already has declared bankruptcy or that has already gone out of business. These lines of credit or small businesses can be bought by investors to keep the lines of credit or the business itself open in spite of the financial difficulty. A lot of smart investors are buying up distressed credit and turning it into major profits.
One of those investors is Peter Lionel Briger Jr., the head of Fortress Investment Group LLC, is famous for helping Goldman Sachs to make highly profitable investments during the Asian Financial Crisis. He is credited with taking the Fortress Japan Opportunity Domestic Fund and turning into a series of profitable investments.
But what does that mean for you. Is investing in distressed credit something that you should look into for your company? What are the benefits?
1. Distressed debt can be bought at incredibly low prices, because the risk of it going completely south is high.
2. At the same time, if you can turn that debt around and into something profitable, you stand to make a ton of money off of a relatively small investment.
Example: A company is very near completely defaulting and has declared bankruptcy. You buy the company (and its debts, which—thanks to the bankruptcy declaration—can be settled for pennies on the dollar) for a small price and then turn it around. The company starts to make a profit again. You, then, sell the profitable and promising company for far more than you paid to acquire it.
It’s kind of like house flipping but with businesses. In fact, all of that sub-prime mortgage debt that tanked the housing industry is a perfect example of distressed debt and credit, which is why developers are buying up the foreclosed upon houses faster than an unsupervised kid will jam his pockets full of candy at the candy store.
As an individual person you probably do not have the financial reserves to take on distressed debt all by yourself. You can, however, work with a hedge fund. You can use that hedge fund to buy distressed credit and turn it into a profitable enterprise for all of the fund’s investors.
It’s also possible to buy distressed debt in the form of mutual funds and via the bond market. These methods are actually a lot easier than acquiring a distressed company. More importantly, these methods allow you to acquire more of the debt, which makes for higher potential profit in the future.
If you are interested in investing in distressed credit, particularly from the International Marketplace, make sure you work with an investment and financial advisor who has experience in this arena. You don’t want to wind up completely upside down!