macrocephalopod

For one thing there are loads of non-bankrupt companies whose debt trades below par, and this doesn’t imply less than full recovery nor does it imply that their equity is worthless!

But even for bankrupt companies it is totally rational for debt to trade below par and the equity to trade above zero, because the equity has much more optionality (if the restructuring goes well the best that the creditors can do is full recovery, the rest goes to shareholders)

Similarly while it’s true that distressed debt investors are more focused on the downside I don’t think that’s a difference in temperament. Rather it’s a rational response to the potential outcomes.

If you’re buying debt at 40 cents the absolute best you can do is a 150% return and the worst is you lose everything. If you buy equity you can still lose everything, but your upside is unlimited (or at least, limited at a much bigger number than 150%)

So of course equity investors are more focused on the upside —that’s where most of the value from holding the equity is! Bond holders stop caring about the upside as soon as there’s enough money to repay the debt because that’s where they stop participating.