Distressed exchange

A debt exchange or restructuring in financial distress that gives creditors less than originally promised without adequate compensation. Under S&P’s criteria, qualifying distressed restructurings generally constitute selective default.

Distressed exchange in round numbers

Hypothetical: a US$100 face-value claim is exchanged for securities valued at US$70 at the exchange date. The US$30 shortfall is relative to face value, not necessarily the investor’s realized loss; that also depends on cost basis and measurement. Concessions can involve maturity or coupon terms as well as principal.

Source: S&P: distressed exchanges and selective default criteria.

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