distressed debt arbirtrage including, somebody, interest, selling, because

willsucceed

can somebody explain how distressed debt arbirtrage works?

- long companys's distressed debt
- short selling company's equity

case 1:
if the firm's condition declines, the debt and equity will both fallin value; the equity should decline more in value, because debt has seniority---> OK

case 2:
if the company's prospects improve, because of the priority of interest over dividends, the returns to bondholders should be greater that that of equity holders, including dividends paid on the short position

dont understand case 2 especially in relation to dividends paid on the short positions. because i have shorted them this shouldnt matter???
thank you

aidebaobao

deriv108 Wrote:
-------------------------------------------------------
> Schweser book 4, page 36. It sounds too good to be
> true.
> Or it's just the arbitrage's belief? Arbitrage
> opportunity does last forever.

Dont have Schweser. I don't know why they would write that.

canadiananalyst

Short sellers have to borrow stock in order to sell short. So they owe the stock back to the lender ( usually a custodian , or bank)

Now when the stock they have shorted pays dividends , the stock will pay dividends to a new registered owner , not to the original lender.

So the short seller now owes not only the stock shares back to the lender he also owes the dividends to the lender( that were paid to someone else).

This is all lvl I or II stuff , why is this coming up here?

IAmNeil

yellayella Wrote:
-------------------------------------------------------
> can somebody explain how distressed debt
> arbirtrage works?
>
> - long companys's distressed debt
> - short selling company's equity
>
> case 1:
> if the firm's condition declines, the debt and
> equity will both fallin value; the equity should
> decline more in value, because debt has
> seniority---> OK
>
> case 2:
> if the company's prospects improve, because of the
> priority of interest over dividends, the returns
> to bondholders should be greater that that of
> equity holders, including dividends paid on the
> short position
>
> dont understand case 2 especially in relation to
> dividends paid on the short positions. because i
> have shorted them this shouldnt matter???
> thank you

Can you give the source of where this is written. Volume and page no.

zwjy

Schweser book 4, page 36. It sounds too good to be true.
Or it's just the arbitrage's belief? Arbitrage opportunity does last forever.