Buyers Beware: Avoidance Risk Travels With Debt Purchases

Law360, New York (May 21, 2012, 1:02 PM EDT) -- The debt of a troubled company is trading in the secondary market at a significant discount because the company is highly levered and is at risk of default.

You see upside in the debt because you believe it will convert into valuable common shares of the company upon its emergence from bankruptcy. You purchase both loans and unsecured claims in the secondary market.

Your investment thesis proves correct and the company’s consensual reorganization plan provides that the company’s balance sheet will be cleaned up and your...
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