To do so requires significant levels of resources and expertise to analyze each investment, the related going concern risk and assess its position in an issuer's capital structure along with the likelihood of ultimate recovery.
[2] In 2012, Edward Altman, a professor emeritus at the NYU Stern School of Business, and an expert on bankruptcy theory, estimated that there were "more than 200 financial institutions investing between $350–400 billion in the distressed debt market in the United States".
The major buyers of distressed securities are typically large institutional investors, who have access to sophisticated risk management resources such as hedge funds, private equity firms and units of investment banks.
[10][11][12][13] Investors in distressed securities often try to influence the process by which the issuer restructures its debt, narrows its focus, or implements a plan to turn around its operations.
While there is no precise definition, fixed-income instruments with a yield to maturity in excess of 1,000 basis points over the risk-free rate of return (e.g., Treasuries) are commonly thought of as being distressed.
Gravitas uses IBM Risk Analytics technology (formerly Algorithmics), which is also used by major banks, to help hedge funds meet regulatory requirements and optimize investment decisions.
[15] When companies enter a period of financial distress, the original holders often sell the debt or equity securities of the issuer to a new set of buyers.
[17][10] In a 2010 article, Blackman and Mukhi examined a series of litigations employed by distressed funds investors in their lawsuits against defaulted sovereign states.
[10] The business plan involved buying the sovereign debt instruments at a deep discount based on a very high risk, and then attempting to enforce the full claim.
[Notes 1][19][20][21] According to the African Development Bank Group, at least twenty heavily indebted poor countries in Africa have been threatened with or subjected to legal actions by commercial creditors and hedge funds since 1999.
[24] That act caps what the hedge funds can collect, they had to settle with Liberia for just over $1 million, and effectively prevents them suing for exorbitant amounts of money in United Kingdom courts.
Nick Dearden of the Jubilee Debt Campaign said of the change, "It will mean the poorest countries in the world can no longer be attacked by these reprehensible investment funds who grow fat from the misery of others".
He told The Guardian that the Democratic Republic of the Congo "desperately needs to be able to use its rich resources to alleviate poverty, not squander them on paying unjust debts".
The award was originally issued by an arbitral panel of the International Chamber of Commerce (ICC) in favor of Energoinvest DD of Bosnia in the amount of $39 million and then sold to FG Hemisphere.
NML Capital, LTD., a hedge fund that is a subsidiary of Elliott Management Corporation, purchased Argentine debt on a secondary market for a lower price.
[33] The Center for Economic and Policy Research reported on an Organization of American States special meeting on July 3, 2014, among foreign ministry officials, in Washington, D.C., to discuss the situation.
[35] According to Mark Weidemaier, a law professor at the University of North Carolina, the ruling was one of "the most significant litigation victories that a holdout creditor has ever achieved" in the realm of sovereign debt.
[35] A July 2014 article in The Wall Street Journal by Georgetown Law professor Adam J. Levitin argued that the relationship between distressed securities investors and the U.S. court system should be revisited.