Secondary trading of distressed debts
Secondary trading of distressed debts

The following Restructuring & Insolvency guidance note provides comprehensive and up to date legal information covering:

  • Secondary trading of distressed debts
  • Key players
  • Motivations
  • Key parties
  • Documentation
  • Novations/transfers
  • Assignment
  • Sub-participation
  • Confidentiality agreements and lock-ups
  • Benefits and drawbacks of secondary debt trading

Companies which are starting to show signs of distress often see their debt being traded on the secondary market at prices below par/face value. The extent to which the debt is discounted to face value reflects the market's view of the likelihood (or not) of the debt being repaid in full.

The original lenders of record (eg banks or lenders which originated the loan) may be keen to sell their debt exposure on in the secondary market to reduce their exposure to a particular debtor or sector.

In complex restructurings, excessive debt trading can make negotiations with key creditors difficult if they are constantly changing creating a ‘revolving door’ scenario.

Key players

Typical secondary debt players include hedge funds, vulture funds, special situation funds, private equity (PE) funds and pension funds.

They trade in secured/unsecured debt, bank or bond debt or trade claims. The secondary debt market is largely unregulated, although the Loan Market Association (LMA), Europe's trade association for the syndicated loan markets, has made significant progress in standardising documentation and processes.


The motivation of a particular creditor will differ depending on the time and price at which it acquired the debt: original lenders of record will have acquired the debt at par and may have a historical relationship with the borrowing company and a desire to maintain a good