Quora Answer: What are Distressed Assets?

The following is my answer to a Quora question: “What are distressed assets?”

A distressed asset is any asset that is put on sale at well below its expected value because the asset owner is forced to sell.  The most common source of distressed assets is due to bankruptcy, personal or company.  An asset may also become distressed, if the owner of the asset, likely a company, is forced to sell it because there is excessive debt, meaning that there is over-leverage.  It is cheaper to pare excessive debt that be petitioned for bankruptcy.

An asset may also become distressed due to regulatory constraints or political concerns.  For example, if a Singapore company invests in a country, and the government of Singapore puts in place sanctions against that country, the Singapore company now has a distressed asset.  Another example, would be if a company is a bank and owns an insurer, and a new law comes into effect banning a bank from owning an insurer and vice versa, that insurer owned by a bank is not a distressed asset.

Interestingly, a debt itself can be distressed debt security, and may be sold.  The subprime crisis started with distressed debt wrapped with rated debt and repackaged as investment grade.  When the market collapsed, due to regulatory oversight, it brought the rest of the economy crashing down.