Event Risk for Disstressed Debt Investing

[clip1989]

Could someone please just explain event risk as it relates to distressed ebt investing? Perhaps an example too of an “event” specific to a company that will impact the value of the distressed debt

 

[janakisri]

Example of an event that could determine a distressed debt holding is a judicial decsion in bankruptcy court. It is a non market decision which could have an arbitrary outcome .
for example if a buyer of the company emerges with some lowball offer to buy the company , the judge could decide that it is in the best interest of suppliers and clients to let that happen , rather than let the debt holders possess the company and sell off the assets ( presumably the debt holders acquired the debt at some pennies on the dollar , but the buyout may be even lower than that )
A different judge could look at the case differently , hence the arbitrariness of the decision.
another event might be the approval of a drug by the FDA after trials are over . Again a somewhat speculative outcome , but the debt holders investments might depend on it.

 

[clip1989]

Ok thank you, the drug approval example really makes it click for me.
Now, in terms of the importance of the different risks (event risk, market risk, liquidity risk, and J factor risk), is there a general order, or does it purely depend on the company being refgerenced?