When a company’s bonds are trading at pennies on the dollar, many investors see a warning sign. But the team at PenderFund Capital Management sees a potential opportunity.
The search for mispriced risk sits at the heart of Pender’s approach to stressed and distressed credit. After more than a decade investing in opportunistic credit situations, including through restructurings and periods of market dislocation, the firm has turned that experience into the Pender Credit Opportunities Fund, which recently marked its third anniversary.
Here, Canadian Family Offices speaks with Parul Garg, Pender’s Associate Portfolio Manager and a specialist in stressed and distressed credit, about where these opportunities come from, what the firm has learned through multiple credit cycles, and how the strategy could fit within a family office portfolio.
What originally drew Pender to stressed and distressed credit?
Garg: The interest grew naturally out of how we already approached investing. We are value investors first—we begin by assessing enterprise value, or what we believe a business is fundamentally worth, and then identify the most attractive risk-reward opportunity within the capital structure. That opportunity can reside in the equity or in the credit, depending on where the value is best expressed.
What initially attracted us to the space was the degree of mispricing we were able to identify. In one of our earliest investments in 2016, the bonds of Energy XXI were trading at roughly 11 cents on the dollar, while our estimate of enterprise value was several multiples higher. Disconnects of that magnitude, in our view, can create compelling upside relative to the downside risk.
From there, one investment naturally led to the next, and over time we worked through several restructurings. Through that process, we developed genuine conviction that we had built a specialized skill set in this area. Every situation has been distinct, but collectively they have provided a meaningful body of cumulative experience. We continue to reference prior restructurings when evaluating new situations as the underlying patterns tend to recur even when the specific facts differ.
For readers less familiar with the space, how do you define stressed and distressed credit?
Garg: It helps to start with how corporate bonds are priced. They trade at a spread over government bonds, which reflects the additional credit risk investors are taking. Higher quality issuers tend to trade at a narrower spread, while that spread widens as the market becomes more concerned about a company’s ability to repay its debt.
Our working definition is straightforward. We generally define credit as stressed when its spread over government bonds exceeds 500 basis points and distressed when exceeding 1,000 basis points. A stressed company may still be performing, but something needs to change. It may need to improve the business or repair the balance sheet to regain the market’s confidence. In a distressed situation, the liquidity pressure is usually more immediate, and some form of restructuring may be required.
There are many ways a company can get there. It may have overpaid for an acquisition or lost an important contract. Sometimes management simply expected too much growth and built a cost structure the business could not support. That is why this work is very different from buying traditional fixed income for income and capital preservation. You have to understand the business from the bottom up, then work through the capital structure and the potential recovery value.
What does it take to manage a strategy like this effectively?
Garg: Stressed and distressed credit requires more than just an investment view. You need an experienced team, strong operational support, the right infrastructure and a mindset that is comfortable working through complexity.
At Pender, we have been investing in this area for more than a decade, and the strategy benefits from the broader fixed income team, the small cap equity team and the wider investment platform. That matters because ideas can come from different parts of the firm, and each situation can be evaluated with both a credit and enterprise-value lens.
This work is very different from buying traditional fixed income for income and capital preservation. You have to understand the business from the bottom up, then work through the capital structure and the potential recovery value.
The operational side is also important. This is a very hands-on mandate. In restructurings, there are claims to file, deadlines to manage and processes that need to be followed carefully. Our experienced operations team and established infrastructure allow the investment team to focus on the analysis while still moving efficiently through those requirements.
Do opportunities only emerge during market crises?
Garg: Not at all. A broad market crisis can create many opportunities because good businesses can be sold along with everything else. But we also find opportunities throughout the credit cycle. Industries have their own cycles, and individual companies make mistakes even when the broader market is healthy.
One sector may be doing very well while another is under pressure from changing economics or regulation. Even in a healthy industry, a company can still run into trouble because management was too optimistic about growth or did not execute well.
We have never found a shortage of things to look at. What changes is the quality of the opportunity set. When high-yield spreads widen, more securities begin to meet our return thresholds. In a severe dislocation, we may be able to buy a stronger company at a double-digit yield instead of reaching further down the quality spectrum. Because we invest in public secondary markets, we can adjust as the opportunity set changes.
What is the biggest misconception about distressed credit?
Garg: The biggest misconception is that distressed means zero. It does not. In some cases, the strongest price appreciation happens around the time a company files for bankruptcy or announces a restructuring. Once investors can see the restructuring support agreement and form a clearer view of the expected recovery, some of the uncertainty comes out of the price. The bonds can reprice materially before the company even emerges.
That does not make distressed investing low risk. It means the market price may be reflecting fear rather than a realistic recovery value. Our job is to understand whether there is a meaningful difference between the two.
What have you learned from investing through multiple credit cycles?
Garg: You do not really know whether a process works until it has been tested through a cycle. Our framework has stayed consistent, and we keep refining it. Our investment checklist is a good example. It started with 10 factors and grew to 13 as experience showed us where we needed to be more explicit.
The most important lesson is position sizing. You can have a lot of conviction and still be wrong, especially in a restructuring, so we limit how much any single outcome can affect the portfolio. We have also learned to trust the process rather than one person’s judgement. A consistent framework helps the team challenge assumptions and assess each situation on its merits.
There are also lessons that are specific to an industry. An airline restructuring can be more opaque than you expect. A software company may have very little tangible liquidation value, so preserving the operating business becomes especially important. We have had investments that doubled or tripled, and others that failed to achieve our anticipated value. You learn from both.
How might the stressed and distressed credit fit within a family office portfolio?
Garg: Alternative credit has become a much more established part of portfolio construction, particularly as investors look beyond passive strategies for differentiated sources of return. In Canada, that allocation has often gone to private credit and other less traditional credit strategies. We believe stressed and distressed credit is well established in the United States, but it is still less familiar here.
Within a broader portfolio, the Pender Credit Opportunities Fund/stressed and distressed credit may serve as a return-enhancing allocation. That potential comes with mark-to-market volatility, so investors need to assess it with a full cycle view rather than expect a smooth return pattern.
It can also complement private credit because the pricing is more transparent. Investors can see changes in net asset value and observe market pricing for the underlying securities, although individual stressed or distressed holdings may still be difficult to trade. The strategy therefore brings a different liquidity profile to an existing alternative credit allocation.
What excites you about the next five to 10 years?
Garg: In our view, volatility has become a more regular feature of public markets. Moves that might have previously looked like the beginning of a broader crisis are now often treated as normal. For an active buyer in secondary credit markets, that can create opportunity. A security may move five or ten points in a short period even when the long-term value of the business has not changed nearly as much.
We are also much more comfortable operating in situations that many investors find difficult. In the early years, we were proving that the process worked. Then we spent time deepening our restructuring skills and building relationships. After more than a decade, the possibility of a restructuring does not automatically tell us a company is doomed. It tells us there is a situation we need to analyze on its merits.
Allocators are also becoming more thoughtful about what can be obtained passively and where active work is required to generate alpha. Distressed investing cannot be replicated through a passive approach. Bondholders may need to read the documentation closely, consult industry or legal experts and take part in negotiations. They also must make decisions as the restructuring develops. As investors look for differentiated sources of return, we believe that kind of active capability will become more relevant.
To hear more from Parul Garg and Geoff Castle, lead portfolio manager, fixed income, on the evolution of the strategy, current opportunities in public credit markets and the role opportunistic credit can play in a diversified portfolio, join our upcoming webinar, “Finding Value in Stressed & Distressed Credit,” on Thursday, October 8, 2026, at 1 p.m. EST. Register here.
This story was created by Canadian Family Offices’ commercial content division on behalf of PenderFund Capital Management, which is a member and content provider of this publication.