Taking the Stress Out of Distressed Transactions

Taking the Stress Out of Distressed Transactions: Improving Outcomes with Risk Management Solutions

Distressed mergers and acquisitions (M&A) transactions are often run on a shorter timeframe and with the sellers being unwilling or unable (if the entity is under formal insolvency proceedings) to provide warranties and/or specific indemnities. These factors increase risk and create concern for potential buyers who may hesitate in buying the target entity or engage in negotiations surrounding the offer price to account for there being no avenue for recourse.

Risk management solutions such as warranty and indemnity (W&I) insurance (in particular, warranties given on a synthetic basis) can be used to bridge the gap between sellers’ and buyers’ appetite for liability and risk, resulting in better disposal outcomes.

W&I insurance is beneficial to sellers by providing them a clean exit and freeing up sale proceeds from escrow arrangements, which could be necessary where the sellers are financially distressed themselves. W&I insurance can also give the buyers peace of mind that they are protected if there are breaches of warranties. This enables the parties to focus on the key commercial points of the transaction instead of being held up over negotiation of warranties.

Where the sellers and the management are not willing or able to stand behind warranties, some insurers are able to provide coverage for “synthetic warranties”. The warranties are “synthetic” in that the warranties are not given by the sellers but negotiated between the buyers and the insurers, outside of the SPA. Though narrower in scope than typical W&I insurance, synthetic warranties can facilitate distressed M&A transactions by providing the buyers with protection against breaches of the “synthetic” warranties, and at the same time allowing the sellers a clean exit, despite the sellers not being able or willing to provide warranties. With the increased number of distressed M&A transactions and increased sophistication of the W&I insurance solution, we have seen the market mature and more insurers having appetite to provide a synthetic warranty solution where viable in Australia and New Zealand.

Tax liability and contingent liability insurance are additional solutions that can help remove roadblocks. These solutions can limit downside risks arising from known issues which could be dealbreakers in the distressed M&A transaction.

Download the full article to learn more about achieving better disposal outcomes in distressed M&A transactions.

This article is co-authored by Xianwei Lee, Head of Transaction Solutions, Asia and Adrian Chai, Director, Transaction Solutions, Asia