Burned Credit Investors Find Relief in Cleaner, Reworked Debt

Distressed debt investors are piling into a new strategy to make money from troubled companies.

For decades, their playbook was simple: buy corporate bonds and loans when they first drop in value and profit from either a gradual recovery or, if things don’t improve, from restructuring negotiations that could hand them an equity stake in the company.

Recent changes in the distressed-debt industry, though, have led some investors to change their approach after watching — and sometimes being stung by — the rise of so-called liability management exercises, which often pit creditors against each other in coercive, high-stakes battles ...