FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
Which is a principal risk specific to distressed debt investing that differs from merger arbitrage?
The main distinctive risk in distressed debt is uncertainty about recovery values and the timing and outcome of the bankruptcy process, compounded by illiquid markets. Regulatory blocking, exchange-ratio changes and withdrawn tender offers are deal-completion risks that belong to merger arbitrage instead.
- AUncertainty over recovery values and the length and outcome of the bankruptcy process, along with illiquidityCorrect
- BThe risk that a regulator blocks a announced acquisition
- CExchange-ratio risk between acquirer and target shares
- DRisk that a tender offer is withdrawn by the bidder
Explanation
Distressed investors face uncertain recoveries, legal and priority disputes, long timelines and thin liquidity. The other options are deal-completion risks typical of merger arbitrage.
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