This “Look Ahead” edition of the ABI Asset Sales Committee’s newsletter will share some insights and perspectives on what we can expect in the coming year.

The Economic Backdrop: What We’re All Seeing
The global economy is currently facing several headwinds, including rising inflation, continued high interest rates, geopolitical uncertainty and supply chain disruptions. These factors are contributing to financial strain for many companies, particularly those with high levels of debt or operating in cyclical industries. As a result, distressed M&A activity has increased as companies look for solutions to their financial difficulties through restructuring, asset sales or strategic partnerships. At the same time, private-equity firms, hedge funds and other investors are finding distressed assets increasingly attractive due to their potential for high returns.

The Role of the Investment Banker in a § 363 Sale
An investment banker in a § 363 sale acts as the instrument through which all stakeholders can be assured that the process was conducted fairly and in the best interests of the estate. The banker does not represent a single stakeholder but rather must look out for the interests of the entire estate, from the fulcrum creditors (those likely to only receive partial repayment of their claim, and often the only class of claims that have a say in an insolvency structure) to the waterfall payout table among stakeholders.

Usually, rather than undertaking a distressed sale, it is better to turn a business around so that it is more profitable and will either sell more or generate cash to pay creditors. However, selling is necessary when that option is not viable, particularly in the eyes of secured lenders.

For example, the current owners might not be capable of turning the business around because they lack the skill to do so and/or they are not willing to invest more money to fund an operational turnaround. Often, this means that the business is in enough of a financial hole that an outside investor is not willing to put equity in the company to fund a turnaround of the business that will enable creditors to be paid.

The group of creditors benefiting from this trade typically receive secure senior priority, increased collateral and potentially stronger protection via favorable covenants. The remaining lenders are exposed to lower ranks in the repayment hierarchy with weaker protections, and the choice to litigate or swallow this bitter pill.