Which risk pertains to market liquidity in distressed investing?

Market liquidity risk is particularly relevant in the context of distressed investing because it refers to the risk that an asset cannot be sold quickly enough in the market without a significant loss in value. In distressed situations, such as when a company is facing financial difficulties, the likelihood of finding a buyer for its securities decreases, and any potential transactions often occur at unfavorable prices.

In distressed investing, investors often deal with securities that may have low trading volumes or a lack of buyer interest, amplifying market liquidity challenges. Unlike other forms of risk, market liquidity risk directly affects the ability to execute trades without incurring substantial losses, which is crucial for investors who may need to liquidate their positions quickly as market conditions change or if their investment strategies require it.

The other types of risk cited have different focal points. Event risk refers to unforeseen events that can affect the value of investments, credit risk relates to the likelihood that a borrower may default on their obligations, and interest rate risk pertains to the potential impact of fluctuating interest rates on investment values. While these risks are integral to an overall investment strategy, they do not specifically address the immediate challenges of selling distressed assets in a timely and effective manner, which is paramount in distressed investing scenarios.