Distressed Asset Investing
- Distressed Asset Acquisitions
- Distressed Real Estate Investments (buying non-performing income property or REOs)
- Distressed Credit Investments (buying or restructuring distressed/non-performing loans)
- Distressed Equity Investments (buying all, or less than all equity of distressed companies)
- Distressed Debt Investments (buying overdue trade receivables for collections)
Distressed asset investing in private assets and private credit (contrasted from publicly traded equity and credit) comes with all of the usual business investment and transaction considerations, plus some additional and different considerations.
It’s important in any business investment or transaction to analyze the opportunity vs. the risk, know the particular market and sector well, understand the product/service, get accurate and verifiable warranties and representations from the credit, equity, or asset seller, and check for recorded liens, judgments, or other encumbrances. In addition, all purchase or investment amounts and terms and conditions should be made clear in the equity/stock purchase or loan purchase contract.
Here’s where distressed asset investing is different:
There may be multiple and unrelated parties involved in a distressed investment. For example, if you’re buying a distressed credit instrument of a business that you intend to help turn around, the seller of the credit instrument is a different party than the company's principal(s). You will need the cooperation of all these parties to develop a turnaround plan and to have success.
In an equity purchase of less than all of the outstanding equity of a company, which is often the case in distressed investing (or a new class of stock is issued to the investor), the purchase agreement should be clear on who has rights to future profits and distributions, and to existing and future assets. It also has to be clear, with an operating or shareholders agreement, who has control of which future decisions, as you will have to have clarity on partnership issues with people whom you have, heretofore, not been in business- always making for a challenging environment.
Even if you're buying a distressed credit instrument, you'll have to work with the business or asset owner(s) if you intend to take steps to make the asset perform, rather than plan to foreclose. Often, it will be the company's principal(s) who sought your help; but, it may be the relationship with the existing lender or industry contacts that gave you exposure and access to the deal.
If a company, owner, or asset, is in distress, it can often be the case that unknown liabilities exist- or will come into existence in short order, or, eventually. If earnings have not been coming through, or an asset is non-performing, it won’t be long until other debts and expenses arise- sometimes, very unexpectedly. You have to make sure that no outstanding company payables (billed, or not yet billed) exist, or you need to know what they are, or will be. All existing contracts and obligations must be made known to you. If you're buying or restructuring credit, you also need to understand the borrower's principals' financial positions so that you can accurately plot a strategy (even if your plan is to foreclose, you want to know if the borrower will fight the action).
Finally, in a distressed equity or credit investment (i.e. buying or restructuring a nonperforming loan), it must be clear what went wrong to cause the company or the credit instrument to become distressed, and if/how you can help to fix it.
The main point is that in a distressed situation, unless you are acquiring one-hundred percent of a company's equity or one-hundred percent of an asset, you will be trusting and relying on existing principals- ones who have already gotten the business or asset into trouble. Even if you're buying the credit instrument, this would be true. If you're buying or creating subordinated debt, you'd also have to work with existing lenders whose loans and liens have priority over your new money. You also may have to deal with any other creditors, such as vendors and judgment creditors.
You need an attorney who understands and can help you properly manage and negotiate all of these parts of a distressed asset investment. I have over twenty years' experience in these transactions and the related issues (including all manufacturing, distribution, licensing, real estate, and brand and Intellectual Property evaluation and maximization components), and can help you develop and execute a well-structured and smart deal.
Neil S. Siskind, Esq.
Neil Siskind, Neil S. Siskind, Neil Siskind Lawyer, Neil Siskind, Attorney