The Anatomy of Distressed Debt Markets

Posted: 12 Jan 2020

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Robert Benhenni

New York University (NYU) - Salomon Center

Multiple version iconThere are 2 versions of this paper

Date Written: December 2019

Abstract

Over the last 30 years, the distressed debt market has come a long way and is now a legitimate investment asset class, albeit with periodic dramatic activity. Despite the benign credit cycle in US markets since the last great financial crisis, there are still more than 200 financial institutions in the United States, and a large number operating in other countries, such as Italy, Brazil, and India, specializing in investment in distressed and defaulted bonds and nonperforming loans. We document this novel and intriguing investment market, with a discussion of size, strategies, and performance. We also present new empirical results on pre- and postdefault experience, leveraging our unique databases on bond and loan prices and our indexes of performance of defaulted bonds and bank loans. The results show that the investment performance in distressed debt is not particularly impressive over the entire sample (1987–2016). For the last 10 years (2006–2016), however, the results are much better for overall outperformance, especially those using several strategies with respect to the seniority of the debt and market timing. This is due perhaps to favorable changes for creditors in the US bankruptcy code in 2005.

Suggested Citation

Altman, Edward I. and Benhenni, Robert, The Anatomy of Distressed Debt Markets (December 2019). Annual Review of Financial Economics, Vol. 11, pp. 21-37, 2019. Available at SSRN: https://ssrn.com/abstract=3516516 or http://dx.doi.org/10.1146/annurev-financial-110118-123019

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

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New York University (NYU) - Department of Finance ( email )

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Robert Benhenni

New York University (NYU) - Salomon Center

United States

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