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Market Update
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U.S. - Private Equity
Printable Version
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While there are signs that the credit markets and the economy are stabilizing, economists do not predict a swift return
to easy credit or robust consumer spending. As a result, we anticipate that balance sheet restructuring for highly leveraged
companies will continue, particularly those that are exposed to the significant downturn in consumer spending.
From 2005 to 2007, private equity firms spent roughly $1.6 trillion on leveraged buyouts. With credit readily available,
the majority of the $1.6 trillion was borrowed money. Those that borrowed heavily and have had a significant drop-off in top
line revenue are locked in negotiations with their lenders to restructure their overleveraged balance sheets. At the same time,
private equity firms with uninvested capital are exploiting opportunities to buy assets from cash-strapped overleveraged companies.
During the last year, many businesses have defaulted on loan covenants and utilized federal bankruptcy protection to restructure their
balance sheets. With the traditional Chapter 11 “Plan of Reorganization” process complicated by challenging credit markets, i.e., a very restrictive
debtor in possession (“DIP”) financing market, most restructurings have been accomplished via an expedited sale of assets through
Section 363 of the bankruptcy code.
Investors looking to participate in a Section 363 process, either as an appointed “stalking horse” or at the later “public auction” stage,
require an experienced insurance and benefits advisor who understands bankruptcy terminology and
procedures. There is a common misconception that purchasing assets out of bankruptcy is a fairly simple and straightforward
process, i.e., the assets are being purchased free and clear so just set up new insurance and employee benefits programs that
are ready to implement at closing. Typically, this thought process falls short, as it does not contemplate the many variables
that can come into play.
An advisor must understand how their client is positioning themselves. Section 363 sales are often subject to a double auction. The seller
markets the assets and enters into a purchase agreement with a selected bidder “the stalking horse.” This is followed by a public auction.
As such, an advisor must ascertain whether the client is participating in a stalking horse bid or the stalking horse has been appointed and
the client is participating in the public auction. Since a stalking horse sets the terms of the asset purchase agreement, an advisor for a
public auction bidder will want to understand what position the stalking horse has taken with respect to the insurance and employee benefits plans.
In other words, have they “accepted’ or “rejected” the insurance and employee benefits contracts. Even though it is likely that a public auction
bidder will mirror the terms of the stalking horse’s asset purchase agreement to remain competitive, it is important that they understand the
company’s insurance and employee benefits plans so they can make an informed decision with respect to the existing contracts. Some key items to
consider include:
- Is there adequate time to arrange new benefits plans in an expedited process? Can a transition services agreement be utilized to bridge the
gap between an old and new benefits plan? If the plan is market competitive, should we accept it to minimize additional disruption to employees?
- What financial obligations are associated with accepting the insurance and employee benefits contracts? For example:
- Responsibility for underfunded defined benefit pension plans;
- Responsibility for claim payments under self-funded medical plans or large-deductible casualty programs such as workers’ compensation;
- Responsibility for replacing collateral/letters of credit associated with insurance programs; and
- Responsibility for additional premiums related to exposure audit adjustments.
Regardless of whether you are positioning yourself as a stalking horse or a public auction bidder, answers to these questions and others are critical to a proper evaluation and bid for the assets being purchased.
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Please contact your Lockton Representative for further information regarding any information contained in this
market update.
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Henry Jennings
Senior Vice President
Global PECAP Practice Leader
New York M&A
Tel: 917.351.2561
E-mail: hjennings@lockton.com |
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