A Note on Distressed Investing: Buying Companies by Acquiring Their Debt

Abstract

Our objective in this paper is to provide a pedagogical discussion of the process by which creditors take control of distressed firms. Distress or vulture investing requires a high level of business acumen combined with deep knowledge of accounting, finance, and corporate and restructuring law. Moreover, the process entails active involvement, as opposed to passive investing in publicly traded securities, as the investor seeks control over the distressed firm’s equity. The process is made more risky and difficult by the many conflicting interests of creditors and equity holders who work throughout the process to protect their individual interests. We are motivated by the growing number of distress investors, and essential nature of their role to the functioning of capital markets.

Keywords: Distressed investing, vulture investing, restructuring

JEL Classification: G00, G33, G34