Issues to consider to proceed with confidence
The downturn has created unparalleled opportunities to expand market share, enter new markets and pursue strategic and financial objectives through investments in distressed assets. For many, the issue is not whether to invest, but how. While prospective target insolvency adds risk, insolvency regimes can facilitate execution. So it’s important for potential buyers to understand the advantages and disadvantages of various strategies as they explore ways to gain competitive advantage in pursuing strategic or financial targets, while lowering the cost and risks.
Options to consider
Here are a number of ways to invest in distressed assets:
Acquisition — no insolvency proceedings. The acquisition of a financially distressed business not subject to formal insolvency proceedings follows standard M&A patterns and avoids insolvency’s stigma and cost. It is important for documents to deal with prospective insolvency risks such as clawback (transaction avoidance in some jurisdictions), successor liability and the seller’s ability to satisfy obligations for representations and warranties.
Asset purchases from insolvent estates. Such purchases can be legally safe and often at a bargain. They usually involve a short, inflexible auction process requiring court approval. Buyer protections through representations and warranties may not be available. Some insolvency regimes provide techniques for negotiating advantageous terms concerning contract rejection and assignment, assumption of debt, etc. Creditor voting is rarely required.
Insolvency plan purchases. Alternatively, buyers can negotiate the acquisition of the business as part of a reorganization or liquidation plan for the insolvent target. These acquisitions can be more lengthy and complex, and require court approval, plus involve creditor voting in certain regimes. But, they can offer greater flexibility (i.e., stock or asset deal, issuance of public securities, etc.), added protection from liabilities and tax advantages.
Prepackaged purchases. Buyers in some jurisdictions (e.g. the US) can negotiate a “prepackaged” acquisition of an insolvent target by an asset purchase or pursuant to a court-approved plan. This typically involves negotiations with a target, at times including its creditors, in contemplation of closing the transaction in an insolvency proceeding. This technique combines the flexibility of standard M&A with the legal safety and other potential legal benefits of an insolvency-related acquisition. Transaction costs and delay can be minimized, and the target business’ exposure to further weakness from insolvency proceedings lessened.
Debt purchases. Investors can purchase the debt of the target, typically at a discount, but can enforce it at face value by “bidding in” the debt to buy the underlying asset. Debt purchasers can position themselves for a controlling position in a foreclosure sale or insolvency, a tactic known as “loan to own.” Debt purchases also can be used to gain leverage by establishing a “blocking position” in a class of claims against the target where creditor voting becomes relevant. Some potential buyers extend financing to an insolvent target as part of an acquisition, particularly with DIP (“debtor-in-possession”) loans in US Chapter 11 cases, to enhance returns, compel an abbreviated sales process and make it more difficult for others to make competitive bids.
Our experience and service advantages
Global perspective, local insight and understanding. We can help you understand your strategic options — and the tradeoffs you are making between price, speed and long-term exposures — and execute your decisions with consistency and confidence in jurisdictions worldwide. Our experience includes acting for creditors, corporate debtors and strategic and financial investors as well as for insolvency officers (e.g., trustees or liquidators).
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