Distressed debt

Also known as impaired debt. Debt which the borrower is unlikely to be able to repay in full to the lender on its maturity date as the borrower is in financial trouble or in an insolvency (www.practicallaw.com/9-385-5821) process. Debt can also be distressed if it is value impaired (for example, the borrower may have breached key covenants (www.practicallaw.com/8-107-6009) in the facility agreement).

Distressed debt is traded on the secondary market (www.practicallaw.com/8-107-7216) below its face value and is generally traded using LMA (www.practicallaw.com/6-107-6779) or LSTA (www.practicallaw.com/6-501-9119) standard documents.

Distressed debt can be contrasted with par debt (www.practicallaw.com/5-381-0311).

For an overview of distressed debt and the distressed debt market in the UK, see Practice note, Distressed debt trading: overview (www.practicallaw.com/3-381-0307).

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