Both the individual and institutional investors become more cautious about their investments in a particular company when the company is in the state of bankruptcy because the returns for the shareholders are likely to be affected by the weak financial performances of a business. However, in order to fight bankruptcy a company often opts for strengthening and improving its financial performances through restructuring activities rather than dissolving the business. The restructuring process requires a substantial amount of expenses. The traditional funding sources are not often usable in the situation of bankruptcy. However, a new form of financing known as distressed financing has evolved in the business world which is especially used to fund the restructuring processes of a financially distressed company. Distressed financing enables the companies to collect funds for the business restructuring process in the form of distressed debt financing or distressed equity financing. The distressed debt financing has formed a large part of the corporate bond market and is considered as a main type of company financing. Distressed financing is a term commonly used in corporate financing activities. Generally when a company is being liquidated and is facing bankruptcy, distressed financing is widely used to enable the company to achieve a turnaround from the existing financing distress through financial and business restructuring activities. The corporate turnaround from the financial distress and bankruptcy can be achieved from a number of methods like corporate valuation, working capital management, debt restructuring, equity restructuring etc. Therefore, the term “restructuring” in distress restructuring is used from a financial perspective rather than an organizational perspective.
Distressed securities are financial instruments including debt and equities in a business which is in the bankrupt stage or is near bankruptcy.