Why companies get into trouble
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
7 min read · updated October 7, 2026
Companies rarely fail overnight. They slide, and the slide has stages. Restructuring bankers are hired at different points along it, and knowing where a company sits on that path is the first thing you need to say about it in an interview.
Stressed, distressed, bankrupt
The dividing question at each step is whether a line has been crossed.
| Stage | The test | What you would see |
|---|---|---|
| Stressed | No line crossed yet; every payment is made, but the numbers point to trouble ahead | Cash falling month by month, a large maturity with no obvious lender, ratios drifting toward their covenant limits |
| Distressed | A line has been crossed, or the market is pricing the debt as if it will be | A missed payment, a failed covenant test, bonds quoted well below par |
| Bankrupt | The company has filed, usually for Chapter 11, and reorganizes under court supervision | A petition, an automatic stay on creditors, a judge |
The market has its own shorthand for distress. A common rule of thumb calls debt distressed when it yields about ten percentage points more than a Treasury of the same maturity. That gap is the credit spread, and it widens as investors lose confidence that they will be paid back.
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Frequently asked
- What is the difference between a stressed and a distressed company?
- Whether a line has been crossed. A stressed company is current on everything it owes but can see trouble coming, such as cash running short or a maturity nobody may want to refinance. A distressed company has gone over the line: it has missed a payment or failed a covenant test, or its debt already trades at a price that assumes a loss. Bankrupt is the step after that, a court filing, usually under Chapter 11.
- What triggers a restructuring?
- Most often the clock runs out: a large maturity arrives that no lender will refinance, or the cash the company can reach is nearly gone. The other triggers are a failed covenant test, a missed interest or principal payment, and a ratings downgrade that closes the bond market just when the company needs it. Candidates tend to name only the missed coupon and the covenant breach, which do happen, but usually late in the story.
- Why would a bond trade at 60 if the company has enough cash to repay it?
- Because the headline cash may not be usable or may not last. The company has to keep a minimum level of cash to operate, it may be burning cash before the maturity arrives, its revolver availability can shrink, and other debt may come due or accelerate first. A price of 60 says the market doubts the company will reach that maturity with the money still there.
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