Distressed Securities

A financial instrument in a company that is near or is currently going through bankruptcy. This usually results from a company's inability to meet its financial obligations. As a result, these financial instruments have suffered a substantial reduction in value. Distressed securities can include common and pferred shares, bank debt, trade claims (goods owed) and corporate bonds.

Taobiz explains Distressed Securities

Due to their reduction in value, distressed securities often become attractive to investors who are looking for a bargain and are willing to accept a risk. Because most of the time these companies end up filing for Chapter 11 or 7, there are substantial risks involved in investing in them. As a result of bankruptcy, equity (common shares) is rendered worthless so those who invest depssed securities look at more senior instruments such as bank debt, trade claims and bonds.

The logic behind this investment is that the company's situation is not as bad as the market believes it to be and either the company will survive or there will be enough money upon liquidation to cover the original investment.