Question

Why do you think investors who are currently holding corporate debt might be concerned about their investment?

Answer 1

Investors who are holding corporate debt are currently concerned about their investment because these corporate debt are highly exposed during times of adverse economic situations, because the probability of recovery of these debt by the lending institutions are adequately lower in adverse economic scenarios.

When there is a liquidity crunch in the economy, and it will lead to higher solvency risk as well as higher credit risk along with default risk, so company would not be able to pay on their debt because of tight liquidity and tight credit market so they will be defaulting upon their debt and the ratings of those debt will be lowered, which are held by investors.

Once the corporate debt are downgraded, it means that company will have lower repayment capability and the return associated with those debt are also in question because even the principal payments are associated with solvency risk, on the part of lenders so investors should be worried about their investment because it can turn bad and there would be lower recovery than original investment price, as they can even be written off at adverse economics scenarios.