PT  - JOURNAL ARTICLE
AU  - Martin S Fridson
AU  - kevin P. Covey
AU  - karen Sterling
TI  - Performance of Distressed Bonds
AID  - 10.3905/jpm.2008.706243
DP  - 2008 Apr 30
TA  - The Journal of Portfolio Management
PG  - 56--62
VI  - 34
IP  - 3
4099  - https://pm-research.com/content/34/3/56.short
4100  - https://pm-research.com/content/34/3/56.full
AB  - Distressed debt is a large and growing segment of the fixed-income market. In this article, the authors expand the empirical basis for active management with evidence on risk and reward. They calculate a one-year default rate of 22% for the category, whether defined by spread or by price. That rate is more than 20 times as high as non-distressed speculative-grade debt. They also address the longstanding question of whether non-distressed investors should automatically take losses on bonds that fall below a stated price threshold. The evidence on price change argues against this strategy, based on a threshold of 70, but the cost of continuing to hold is a higher default rate than many investors can tolerate. Finally, a strong correlation indicates that distressed investors earn the highest returns on the lowest-priced bonds, but there is a severe penalty for selecting the wrong issues.TOPICS: Fixed-income portfolio management, technical analysis, in markets