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How alternative data can unlock opportunities in distressed debt

The distressed credit opportunity has rarely looked so appealing to hedge funds and other investors in financial markets.

Apr 12, 2024

How alternative data can unlock opportunities in distressed debt

The era of higher interest rates following the global pandemic has put pressure on many businesses. The “free-money” years following the 2008 financial crisis, when low or negative interest rates made it easy to service debt, are over.

This has created an opportunity for funds trading corporate credit — the money companies borrow from investors (through issuing bonds) to finance their operations. When these companies struggle, their balance sheets become “distressed” and lenders can profit by buying debt cheaply and betting on a turnaround (or at least repayment).

The scale of the opportunity means demand for alternative sources of data on the corporate bond market has skyrocketed as a result.

This primer will cover how alternative data can be used to gain company-level, sector-level and instrument-level insights, which help distressed debt specialists make their investments.

Alternative data can provide hedge funds and other investors with actionable insights into the corporate bond market. In the distressed debt sector, where conventional data is often lacking, investors can exploit new data sources and techniques to identify elusive trading signals and opportunities.

In 2023, distressed debt indices from several industry data providers reported net positive returns to end the year. That is continuing in 2024, with PivotalPath highlighting credit-focused hedge funds as among the top performers in the 12 months to February.

The money-making opportunities in distressed debt mean demand for new data sources will only grow, especially as interest rates are likely to stay elevated.

Challenges faced in sectors such as commercial real estate and hospitality, which face higher borrowing costs and lower revenues, make it a golden moment for investors.

But what kinds of alternative data can be used to capitalise on these opportunities?

1. Evaluating the health of bond issuers

Traditional and alternative sources of company financials can provide a sense of the health of bond issuers – the underlying companies. Hedge funds can use this information to decide whether their bonds offer an opportunity to profit.

Datasets listed on the Neudata platform can give a sense of five key elements that form a picture of company health:

Source: Neudata

Traditional sources: Basic financial disclosures can be an easy and cost-effective starting point for investors looking to determine whether a company can keep up with repayments. Providers in this space often consolidate publicly available information and make it more accessible to investors.

SEC filings are among the most cost-effective sources for this data, as all public bond issuers are required to disclose information, including income statements, balance sheets and cash flow. While individual filings are already publicly available through the SEC’s EDGAR database, providers that scrape and structure these filings make the data more digestible for investors.

Alternative sources: Traditional providers are cost-effective, but those that scrape SEC filings only cover public issuers. Other vendors in the space provide more holistic coverage of corporate issuers by:

  1. Covering both private as well as public issuers
  2. Specialising in distressed debt instruments
  3. Combining company financials with other alternative sources

As a result of these additional elements, the offerings become more appealing to hedge funds and other specialist bond investors.

2. Predicting default

Evaluating the health of bond issuers is extremely useful. But predicting default — when a company misses a repayment — is where it gets really interesting.

Distressed debt investors use various methods to assess the risk that a company will default on its obligations. Often, providers in this space will generate a predictive score that inputs various factors to forecast the likelihood of a company facing financial distress in the coming 3-12 months. These models often track company and industry-specific information, plus the wider economic climate.

3. Tracking corporate bond prices

An accurate understanding of current bond prices can be key to successful distressed debt strategies. Typically, investors rely on more traditional market data players to source pricing, such as Bloomberg. In the alternative data space, providers can derive pricing insights using unique methodologies that can often add additional insights to more traditional market data. 

Sophisticated distressed debt investors are looking for new and original sources of data to give them an edge — and have big budgets to spend. The scale of the opportunity in credit means it is one of the hottest areas in alternative data at the moment.

4. How Neudata can help

This article has evaluated how alternative data can help unlock the current opportunity in distressed debt. When it comes to finding the right data, Neudata can help.

Neudata is a research platform focused on alternative data. We provide the world's most expertly curated alternative data catalogue — the global authoritative source for unbiased, independent alternative data intelligence.

If you are a data buyer looking for an introduction to the alternative data landscape in distressed debt, you can request a free trial to discover how Neudata can help.

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