At times of crisis, the global markets experience an increase in distressed M&A and restructurings.

Distressed Solutions

Legal systems offer tools for dealing with distressed situation.

De-risking adds certainty.

 

In case of expected insolvency preventive restructuring procedure enables debtors to secure a court-approved stand still and ample time for negotiations with the creditors.

In case companies are already insolvent, both debtors and creditors may initiate compulsory settlement.

W&I Insurance is designed to cover unknown of unforeseen breaches that are possible to disclose against.

In a distressed situation, buyers do not typically get warranties from sellers; moreover, if the company is in a formal insolvency process, administrators do not give warranties.

Even where warranties can be obtained, there is often going to be doubt about whether the seller will be able to stand behind the warranties if a claim arises. Insurance is always transferring the risk for the Seller’s warranty breaches.

In practice, W&I insurance can offer coverage for distressed situations, for example:

  • backing a nominal 1 euro liability cap in the SPA for distressed sellers with deal matching insurance liability cap (10-30% of Entreprise Value), and

  • facilitating capital injection for equity investors into troubled but not distressed companies and thereby backing JV structures, especially in minority stakeholding scenarios.

“Synthetic” Warranties I.

“SYNTHETIC” WARRANTIES ARE SO-CALLED BECAUSE THEY ARE PROVIDED BY THE INSURER AND NOT THE SELLER.

“Synthetic” Warranties are dictated by the following factors:

  • Quality and extent of Due Diligence

  • Reasons for requiring a synthetic warranty pack

  • Type of asset / target company

  • Jurisdiction

  • Size of transaction

  • Effective “hive-down” or “carve-out” of the assets

“Synthetic” Warranties II.

“SYNTHETIC” WARRANTIES ARE AVAILABLE IF INSURERS HAVE THOROUGH DUE DILIGENCE AND VENDOR DISCLOSURE VIA A WELL POPULATED DATA ROOM, AND ARE OFTEN PRESENTED AS A SOLUTION WHEN THE SELLER IS IN ADMINISTRATION OR RECEIVERSHIP.

Buyer Benefit:

  • more certain deal protection than standard escrow/indemnity cap through insurance equivalency

Seller Benefit:

  • potentially avoiding a price chip being put forward by the buyer as a result of the absence of warranties or indemnities.