Distressed-Debt Investors Send Out Their Own Distress Signal

When distressed-debt investor Mudrick Capital Management bet on an aviation startup in December, it was a sign that opportunities have dried up in one of the most lucrative corners in finance.

Despite pandemic woes and market turmoil, investors that trawl for beaten-up credit are struggling to put a glut of money to work. The unused capital for buying under-water loans and bonds surged 58% in the course of the pandemic to $95 billion in 2021, according to investment-data company Preqin.

Crisis-fighting policies such as low-interest rates and state-backed financing are propping up troubled companies. That’s unlikely to change soon even ...