Event-Driven Credit

Event-Driven Credit targets credit instruments whose pricing is primarily influenced by an identifiable corporate event: acquisition financing, tender offers, liability management exercises, covenant amendments, distressed exchanges, restructurings, or bankruptcy processes. The goal is to earn returns through mispricing around probability, timing, and legal/documentation outcomes.

This strategy requires strong legal and documentation skill. Small contractual details—change-of-control provisions, baskets, priming risk, intercreditor terms—can determine whether a trade is protected or impaired. The work is less about macro “credit beta” and more about event path analysis.

How allocators define event-driven credit risk drivers

• Event probability and timeline: approvals, financing certainty, process duration
• Documentation quality: covenants, baskets, collateral, guarantees, remedies
• Capital structure positioning: seniority, priming risk, intercreditor dynamics
• Liquidity and technicals: forced selling, index constraints, position sizing
• Counterparty/issuer behavior: sponsor aggressiveness, liability management history
• Recovery analysis: asset coverage, enterprise value, restructuring outcomes
• Legal jurisdiction: enforceability, bankruptcy regime, precedent risk

Allocator framing:
“In a downside scenario, do we win on documents and position—or do we find out we’re structurally subordinated?”

Where it matters most

• volatile credit markets where technical selling creates dislocations
• sponsor-heavy sectors with frequent liability management activity
• stressed situations where legal terms dominate economics

How it changes outcomes

Strong discipline:

• generates idiosyncratic returns less tied to overall spread movement
• captures mispricing created by complexity and timing uncertainty
• improves downside resilience through seniority and documentation focus

Weak discipline:

• “thesis trades” ignore documents and get primed
• timeline slippage erodes IRR and increases mark-to-market risk
• liquidity constraints force exits before the event resolves

How allocators evaluate discipline

They look for managers who:

• can explain the trade in terms of documents, not narratives
• show scenario trees: base / delay / adverse legal outcome
• demonstrate restructuring experience and creditor negotiation skill
• manage position sizing and liquidity constraints conservatively

What slows decision-making

• unclear legal terms and insufficient documentation diligence
• uncertain financing or regulatory approvals
• weak recovery analysis and overreliance on sponsor goodwill
• limited liquidity in the instrument

Common misconceptions

• “If the event happens, we win.” → outcomes depend on docs and positioning.
• “Seniority guarantees recovery.” → priming and intercreditor terms can override.
• “Timing is predictable.” → delays are common; IRR sensitivity is real.

Key allocator questions during diligence

• What are the key covenants and how can they be used against us?
• Where do we sit in the capital structure and what is priming risk?
• What are the downside scenarios and expected recovery ranges?
• What is the liquidity plan if timelines extend?
• What precedent cases support the legal assumptions?