Signs of an increase in "seller capitulation" – an uptick in bankruptcy filings, increased concerns about liquidity and access to capital, continued pricing pressure – are motivating potential sellers to unload assets or businesses in order to pay down debt and increase liquidity, said Locke Lord partners Bill Swanstrom and Matt McTygue, during a program in the firm’s Boston office on Thursday that addressed financial distress in the energy sector.
"That's the good news for potential buyers of companies," said Swanstrom, co-chair of Locke Lord’s Energy Practice Group. "The challenge for buyers, as always in these situations, is deciphering whether they are buying a 'falling knife,' or instead are buying quality companies or assets at attractive prices, with the opportunity to generate a significant upside."
Adding to that challenge is the fact that downturns tend to result in more litigation risk, more employment-related claims and more counterparty credit-risk. Careful due diligence by buyers can help mitigate that risk, as can strong indemnities and – increasingly – rep and warranty insurance products, Swanstrom added.
McTygue, managing partner of the firm’s Boston office, noted that many private equity clients benefit from limited, strategic buying opportunities, "and we expect that many more will do so in the second half of the year."
"But those opportunities are only available to those that have the balance sheet flexibility to take advantage of them," McTygue said. “They will also need patience, as this downturn is shaping up to be a long one – longer still if the nuclear treaty with Iran is ratified and they begin contributing to the global industry oversupply."
A Q&A Series package on "Financial Distress in the Energy Sector" – pulled from the Boston event on Thursday -- includes the following features from Swanstrom and McTygue, as well as from Karl Fryzel, co-chair of Locke Lord’s Tax Department, and Bankruptcy, Restructuring & Insolvency partners Rick Kuebel and Jonathan Young.
• 'Seller Capitulation' Fueling Increase in Sale of Energy Assets by Bill Swanstrom and Matt McTygue
• Tax Planning When Investing in Distressed Assets by Karl Fryzel
• Drop in Commodity Pricing, Liquidity Drives 'Upstream' Bankruptcy Filings by Rick Kuebel and Jonathan Young