A vibrant and transparent secondary market which is deep is a sine qua non for sound financial development.

Thanks Emmanuel. In the US listed companies are 1/6 of the ones in bankruptcy. Bad assets need to be repriced and sold. The deeper and more liquid the tertiary market are, the easier these assets will be traded.

Wow Victor! This is a reality check! I opened the attachment and it was really surprising for me.

Anyway, the numbers are a little bit misleading. Let me explain it. Established primary and secondary markets in the US are markets for companies with some size. Even when you talk about small caps or microcaps you are talking about companies that usually capitalize in the cents of millions of usd.

If you talk about proper and sound primary markets you should also research a little bit on the numbers of crowdfunding platforms, business anngels platforms and so on. I know that these are not "pure" markets, but cover the majority of the new projects financed (the majority of the projects, I am afraid that not most of the money)

I am pointing this because the numbers for distressed on bankrupted companies cover all the companies (not only listed companies). If the numbers where about listed companies that went bankrupted probably the numbers would be different and much smaller. So you are mixing traded companies with distressed companies that may not be listed.

That said, it is sure that a sound market for distressed assets and companies would be great, but there are a lot of things to think about in terms of standarization and potential use from an investor perspective. I mean, there is a lot of people in the distressed arena in the hedge fund and private equity world. And they always say that investing and exiting troubled assets and torubled companies is not an easy game, and it is even more difficult due to the high rate of fail of this investments.

So creating a sound market for distressed companies, or deploying an initiative in that space could be a great challenge... although "Audentes fortuna iuvat". Let me know if you are thinking about this idea

Best Carlos

Thanks Boniface and Carlos. Let me point out some brief ideas. Primary and secondary markets value assets depending on the investor’s expectations. They perform well, since assets are “good”. However, distress or tertiary arrays always reprice the assets to a lower extent as “bad”. If the new price is 1/6 of the “good” price, then the haircut of 5/6 means a loss in the investor’s balance sheets. Finally, the repriced asset is acquired by another risky investor and recycled to the market again as “good”. If recycling is a profitable business, then investors should try to find the way to avoid such a huge haircut.

Hi Victor, great point.

I would say that there is a problem for traditional investors in this particular area. Usually, the distress situation implies a forced sell for many institutional investors due to their mandates. That is why it creates a good entry point for specialists like distressed investors. A (formal) market for distressed securities should try to avoid a force sell for those investors or provide a higher (in price) exit point for them.

People from the distressed community would argue that their added value consist precisely on transforming an asset with a high discount into something more valuable, and that increasing their entry point (the price) into those opportunities could create a trade off them. But this is only an opinion.

Best

Carlos

Thanks Carlos. Your comments are suited and welcomed.

Victor, just a final comment.

As a financial markets researcher i would say that trying to improve the liquidity and efficiency of the market for distressed securities is a fantastic goal. So, please, do not understand from my words that I do not get the point. I think that if you find a way to improve (even slightly) the current situation, it would be a fantastic outcome for the financial community.

Maybe some people desagree, but at the end of the day I would say that finding a better exit point for legitimate owners of claims on securities that become distressed is a better equilibrium for the vast majority of investors.

Both primary and secondary markets are important. Primary market provides opportunity to raise fresh capital and secondary market provides liquidity. Development of both the markets are necessary for the development of the economy.

Thanks Iqbal. My point is that the size and complexity of the tertiary market is somehow ignored by the literature. If you see the data from the US firms you will realize that a deep and efficient distress market would help to the financial development of an economy. In good times, it provides an exit door to investors from non-performing assets and in bad times reduces the fiscal efforts under massive bailouts.