Why companies get into trouble
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
6 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
| Stage | What it means |
|---|---|
| Stressed | Still paying its interest, but heading for trouble: a big maturity it may not be able to refinance, or cash running low |
| Distressed | Has crossed a line: a missed payment or a covenant breach, or debt trading at prices that imply a loss |
| Bankrupt | Has filed, usually for Chapter 11, to reorganize under court protection |
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?
- A stressed company is still paying its interest but is heading for trouble: a large maturity it may not be able to refinance, or cash running low. A distressed company has already crossed a line, usually by missing an interest or principal payment or breaking a covenant, or its debt trades at prices that say the market expects a loss. Bankrupt means it has filed, usually for Chapter 11.
- What triggers a restructuring?
- Running out of liquidity, a maturity the company cannot refinance, a covenant breach, a missed interest or principal payment, or a credit rating downgrade that shuts it out of the debt markets. A missed coupon and a covenant breach are the obvious answers, but the maturity wall and liquidity are what most often force the issue, and interviewers listen for them.
- 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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