A bond trading at 40 cents on the dollar is priced on what creditors expect to recover through a reorganisation or liquidation, not on its coupon. The analysis is therefore about the capital structure, the collateral, and the legal process rather than about earnings growth.
Some investors trade the paper; others buy into the class most likely to receive equity in a reorganised company, a loan-to-own approach that converts a credit position into control. Which tranche sits where in the priority ladder decides who is negotiating and who is a spectator.
Risks are legal as much as financial: intercreditor terms, the possibility of new money jumping the queue, jurisdiction, and timelines that can run years. Positions are illiquid once a process is under way. See event-driven and capital-structure-arbitrage.
Related: event-driven, capital-structure-arbitrage, private-credit, illiquidity-premium, hedge-fund, convertible-bond