Mastering The Market Cycle
The Distressed Debt Cycle
The opportunities for top returns in distressed debt come and go. What causes the fluctuations in distressed debt cycles?
- Risk averse investors limit quantities issued and demand high-quality.
- High-quality issuance leads to low default rates.
- Low default rates cause investors to become complacent and risk tolerant.
- Risk tolerance opens investors to increased issuance and lower quality.
- Lower quality issuance eventually is tested by economic difficulty and gives rise to increased defaults.
- Increased defaults have a chilling effect, making investors risk averse once more.
- The cycle restarts.
Each event in a cycle causes the one that follows.