TAILIEUCHUNG - Market Dynamics and Investment Performance of Distressed and Defaulted Debt Securities

Despite the fact that some distressed investors have abandoned the market in the last few years as the supply of new defaulted debt has diminished, there still exists an impressive number of investors who specialize in this rather unique asset class. The primary vehicle for investing is a limited partnership, whereby a particular distressed-asset investment manager raises funds from financial institutions and wealthy individuals. Also, increasingly we observe institutions putting together a distressed or restructuring fund in order to place money with a small number of distressed securities managers who have different styles and preferences (., active vs. passive investors -- see below) | Market Dynamics and Investment Performance of Distressed and Defaulted Debt Securities Edward I. Altman December 1998 Professor Altman is the Max L. Heine Professor of Finance Vice Director NYU Salomon Center Leonard N. Stern School of Business. The author acknowledges the research assistance of M. Christian Saxman and Luis Beltran. Edward I. Altman New York University Salomon Center 44 West 4th Street Suite 9-61 New York NY 10012. Tel 212 998-0709 Fax 212 995-4220 E-Mail ealtman@ Market Dynamics and Investment Performance of Distressed and Defaulted Debt Securities Introduction The market for investing in distressed and defaulted debt is continuing to receive a great deal of attention despite the shrinkage in the supply of new securities in the last few years and the recent 1997-98 poor return performance to investors. This is primarily due to the expected growth in the supply of new distressed and defaulted public and private debt paper the perception that prices are now at attractive levels and the documented relatively low correlation of returns with the more traditional debt and equity markets. This article reviews some of the important attributes of this unique investment vehicle and updates our analysis of the risk and return performance of defaulted debt. Distressed securities can be defined narrowly as those publicly held and traded debt and equity securities of firms that have defaulted on their debt obligations and or have filed for protection under Chapter 11 of the . Bankruptcy Code. A more comprehensive definition would include those publicly held debt securities selling at sufficiently discounted prices so as to be yielding should they not default a significant premium over comparable duration . Treasury bonds. For this segment I have chosen a premium of a minimum of 10 percent over comparable . With interest rates falling as much as they have by late-1998 this definition would currently include bonds yielding at .

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