• Investing higher up the capital stucture provides asset protection (versus equities at the bottom).
• Asset backing makes maximum downside generally quantifiable, allowing for prudent risk management.
• Distressed securities generally trade at significant discounts (eg 30 cents in the dollar), allowing for significant upside potential.
• Global credit markets are larger than equity markets and significant liquidity allows active buying and selling during times of stress.
• Investment managers can add value from actively working with companies to deliver outcomes either via a debt restructuring process or even through a bankruptcy process.

The Distressed Market

• Investment managers target senior debt, subordinated debt, and, to a lesser extent, equities - key to analysis is recovery under worst case scenario.
• A weak economic environment combined with record issuance in 2007 and 2008 of lower rated credit has created a large investment opportunity which is magnified by abnormally large debt maturities coming through and high expected corporate default rates.
• As such, more than  US$2 trillion of leveraged loans and high yield debt needs to be refinanced over the next five years.
• Even if the economy should improve, and thus reduce default rates, the volume of refinancing is still expected to be significantly in excess of demand, which will lead to restructurings.
• At the same time, many traditional providers of capital (eg investment banks) have departed the market and, as such, there are fewer means for companies to obtain refinancing, which leads to more companies defaulting.