Bankruptcy & Investing

Despite bankruptcy, a company might have many valuable assets, such as land and equipment.

Corporate bankruptcy represents a second chance for businesses. It may also signal an opportunity for investors.

Types of Bankruptcy Investing

There are many ways in which an investor can invest in a company going into or coming out of bankruptcy. Stocks, claims and bonds in insolvent companies can all trade at a discount.

Types of Corporate Bankruptcy

Businesses will almost always file under Chapter 7, which liquidates the company’s assets and gives the proceeds to creditors, or Chapter 11, which allows the company to restructure itself and alter its obligations.

Risk and Return

One of the basic principles of investing is that risk and expected return are often correlated. Thus, while investing in distressed businesses can be risky, it can also pay off handsomely.

Vulture Investors

Vulture investors belong to a class of investor that seeks out distressed debt.

Limitations

Certain types of institutional investors, such as pensions, are often unable to invest in bankrupt assets because of the risk involved.

References

• Bloomberg Businessweek: ‘Vulture’ Investors May Shield Prices in Bankruptcy
• Magnum Funds: Distressed Securities Investing