The Distressed Debt Cycle

The opportunities for top returns in distressed debt come and go. What causes the fluctuations in distressed debt cycles?

1. Risk averse investors limit quantities issued and demand high-quality.
2. High-quality issuance leads to low default rates.
3. Low default rates cause investors to become complacent and risk tolerant.
4. Risk tolerance opens investors to increased issuance and lower quality.
5. Lower quality issuance eventually is tested by economic difficulty and gives rise to increased defaults.
6. Increased defaults have a chilling effect, making investors risk averse once more.
7. The cycle restarts.

Each event in a cycle causes the one that follows.