Article at a glance:

The allure of distressed debt

Record numbers of defaults on bank loans and bonds have caught the interest of institutional investors, which are attracted by distressed debt's returns, usually somewhere in the teens. But vulture investors should be wary of this asset class, since it looks less promising than did the last bumper crop of distressed debt, in the early 1990s. This time around, the business models of many borrowers are unproven, and they have fewer tangible assets—a situation likely to yield lower returns.

The take-away

Institutional investors that decide to invest in distressed debt are likely to work through specialist firms that try either to control defaulting companies or to resell the debt at a gain.