Distressed Debt is starting to make a lot of noise in the alternative investment arena and with everyone jumping on the boat; it might be ready to tip.  I have seen numerous announcements of new distressed debt funds and I think we will keep seeing more down the line.  Here’s my question; does anyone really know how distressed the debt really is?  Think about this from the numbers perspective and let’s use simple numbers for this example.  If you bought $100,000 note that was 100% financed for 65 cents on the dollar in a market that depreciated 20%, what would you end up with.  Basically you would end up with an asset that was worth $80,000 for $60,000 or an 81% LTV (Loan-to-Value).  Then take attorney’s fees, management fees, and the eminent broker fees when you sell it and now what do you end up with? Not much, and that is what’s concerning.   If that didn’t give you enough pause then let me add another wrinkle into this scenario.  Due to the fact that the number of lenders that are readily giving out credit is being reduced on what seems to be a daily basis, then there will continue to be a vacuum in the real estate market.  This vacuum will continue to add downward pressure on prices and upward pressure on sale times that will make it increasingly difficult to execute the exit strategy of these distressed debt funds, which is the sale of the property backing the debt.  The longer it takes to sell, the smaller the profit due to carrying costs and the potential for continued price deterioration.  This is something I will cover in my next article and in the meantime, all bets are off.