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As distressed M&A activity inevitably heats up, strategic buyers and equity sponsors that have sat on the sideline for an extended period of time will likely have expanding interest in purchasing viable, but over-leveraged, businesses that are being sold out of bankruptcy. The benefits of buying the business of a Chapter 11 debtor, such as obtaining a court order explicitly limiting assumed liabilities and containing other buyer protections, are relatively well known. This article focuses on the financing opportunities this activity will create for lenders, highlights the benefits of financing bankruptcy acquisitions, and identifies some potential challenges and best practices to ensure that lenders minimize any risks and receive maximal protection for themselves.
For in-court distressed transactions, a debtor typically proposes a buyer to serve as a "stalking-horse" or platform bidder to establish a price floor and then conducts a marketing process to solicit competing bidders to participate in an auction to obtain the highest, or otherwise best, sale price. In exchange, the stalking horse generally negotiates the parameters of the sale process and certain buyer protections, including a break-up fee. Where it is not able to secure a stalking horse, the debtor often runs a similar bid solicitation process, with the hope of generating the interest of multiple bidders, so it can conduct an auction and maximize value. The debtor and its advisors, in consultation with the primary creditor constituencies, select the winning bidder, subject to the presiding bankruptcy court's review and approval. The entire sale process can often be completed in 30-60 days and does not require the resolution of any inter-creditor or other ancillary issues necessary to complete the Chapter 11 process.
Lenders may have the opportunity to finance a stalking-horse bidder or a potentially-competing bidder. Given certain bankruptcy protections discussed below, these opportunities may actually be more attractive for lenders than non-bankruptcy financings. Any potential challenges can be mitigated by following the best practices described below.
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