Distressed companies are distressed because they are unable to meet their covenants, or rules placed by lenders, on their debt obligations.

For some companies, this can be because they overlevered and do not have the ability to have their operations cover their interest on debt.

If this is the case, the company must restructure itself. Financially and/or operationally.

Often, companies fall into financial distress because their operations are economically unviable.

So, they must restructure operationally.

Hire new management. Invest in new, high return projects. Etc.

But, in order to do so they need new money.

But, how can companies get new money if they are already overleveraged?

By definition, don’t they have too much debt to handle? Yes.

But, lenders understand that if the company does not get new money in, the company cannot continue to operate.

If the company cannot continue to operate, then all its assets must be sold off in a Chapter 7 bankruptcy.

In this case, the lenders will often lose more than they would if the company were to continue to operate as a going concern.

So, it is often better for all parties involved to see the company get new capital from investors than to see it go under for the highest recovery across creditors.