Distressed Securities

Securities can be distressed, too. Distressed securities come with distressed companies, when companies are in the beginning stages of bankruptcy.

Distressed securities are equivalent to those “Going out of business, everything on sale!” sales that you see in windows now and then, except they’re securities (financial instruments, like shares, debt, and corporate bonds).

Say Bilbo Baggins’ Bags is a big Corp that can’t cover its bills (“meet its financial obligations” in finance-speak) in a parallel universe where nerdiness reigns supreme. The company could make and sell distressed securities—ones at big discounts and are labelled as distressed—as a last-ditch effort before heading for bankruptcy.

Who would buy securities from a business on the way out? Bargain-hunting investors. Some will buy these super-discounted securities thinking it’s worth the low price that the business might bounce back, or they’ll wait to cash out on the securities come liquidation time (at least for debt and bonds...equity isn’t worth anything after a company’s filed for bankruptcy).