Question

What other costs of financial distress can you think about, that would need to be managed by the distress investor

Answer 1

An investor is in distress when he finds it hard to run his business due to higher costs than the revenues. Apart from the running costs of business the other costs that an investor has can be higher cost of capital as interest rates are high from the banks due to higher risk in financing a distressed business. Apart from that, as the business is in distress it also leads to loss in proftability as the management is trying to cut losses, workers' might also face loss in productivity as they are worried about their jobs. The suppliers of business might start charging more money upfront due to increased risks and the customers might start looking for alternatives.The investor might be forced to sell off assets at lower costs than the market price to raise funds.

Overall, distress costs can be divided into two categories:

1. Ex-ante (before the event (bankruptcy)): It includes costs like increased borrowing costs which a company might face due to its distressed position

2. Ex-post (after the event): It includes the cost that a company has to bear after it files for bankruptcy like lawyer fees, filing for bankruptcy etc.