Now is the time for investors to go shopping

In the current economic landscape marked by fear and uncertainty, several industries, including retail, hospitality, and oil and gas, are grappling with the profound impact of the ongoing pandemic. Reduced consumer spending, disruptions in supply chains, and the looming threat of extended recession have led to distressed situations, creating a unique window of opportunity for savvy investors. This article explores the potential for investors to capitalize on these opportunities, particularly in the realm of distressed asset acquisitions, shedding light on the dynamics, challenges, and advantages inherent in such scenarios.

Identifying Opportunity in Distressed Assets:

Amid the market turmoil, well-run companies with resilient products may find themselves undervalued due to circumstances beyond their control, such as reduced consumer spending power or pandemic-induced challenges. Over-leverage from previous acquisitions and a decline in EBITDA may further diminish their valuation. Equity holders, hesitant to double down in times of uncertainty, may face pressure from lenders declaring defaults. This sets the stage for exploring "strategic options," ranging from refinancing to attracting new investors or a potential sale.

Selective Approach to Distressed Situations:

Not every distressed situation warrants intervention, and investors must carefully evaluate each case. Companies that failed to adapt to changing consumer preferences, over-expanded without a robust e-commerce strategy, and lost touch with their customer base may present limited value. In such cases, the salvageable assets, such as intellectual property, may be the only viable components for potential investors.

The Distressed Asset Acquisition Landscape: Distressed situations, often culminating in bankruptcy, offer investors the prospect of acquiring assets at discounted prices. However, negotiations typically begin with a focus on liquidation value rather than traditional metrics like EBITDA multiples. Secured lenders, prioritizing recovery of their indebtedness, exert significant control in these scenarios and may be reluctant to grant extensive forbearance or covenant modifications.

Chapter 11 Dynamics and Expedited Sales:

While Chapter 11 bankruptcy is designed for reorganization, it has increasingly become a pathway for expedited asset sales. Lenders, growing impatient with sustained losses, often favor a swift resolution. Buyers equipped with the ability to conduct rapid due diligence, move swiftly to contract, and secure financing have a distinct advantage in this environment. Chapter 11's unique ability to provide a "free and clear" status for acquired assets further enhances its appeal for both sellers and buyers.

The Importance of Speed and Due Diligence:

Buyers who can navigate the complexities of Chapter 11 sales with speed and efficiency are highly coveted. Their ability to assess relationships with vendors, customers, and employees promptly, coupled with readily available financing, positions them as ideal candidates. Chapter 11 debtors, facing fears of further devaluation, prefer buyers who can expedite the sale process.

Chapter 11 "363" Sales:

A Strategic Opportunity: Chapter 11 "363" sales, named after the relevant section of the Bankruptcy Code, provide a streamlined mechanism for asset sales. Investors with swift financing, adept due diligence capabilities, and a keen understanding of risk mitigation strategies can find lucrative opportunities in this framework. The court's authority to declare assets "free and clear" adds an extra layer of certainty and expedites the transaction, benefiting both buyers and sellers.

In the face of market turbulence and economic uncertainty, distressed asset acquisitions present a compelling opportunity for investors with the agility to navigate the intricacies of Chapter 11 processes. Recognizing the advantages and challenges inherent in such scenarios, investors can strategically position themselves to capitalize on undervalued assets, contributing to the broader economic recovery while maximizing their returns.