Transaction Insurance Offers ‘Pressure Valve’ for Distressed Dealmakers
By Matthew B. Wiener
Distressed companies searching for ways to improve capital management, stabilize their businesses and preserve stakeholder value are driving activity in the distressed M&A market. The trend means new opportunity for buyers and sellers alike, and has led to unique considerations for deal parties and their advisors engaged in distressed transactions.
While M&A recovery gained steam in the second half of 2020, and has continued at accelerated levels in 2021, there remains a critical focus by parties on how to best address transaction liabilities for distressed M&A. Investors with sophisticated strategies on risk mitigation have been using insurance capital in the distressed transaction markets to achieve better outcomes and drive value, and in many cases, the difference comes down to an often-overlooked risk mitigation tool: transaction insurance.
COVID-19-induced risk and volatility made it difficult in 2020 in many respects to accurately price assets. But even with this disruption, the total U.S. deal volume of roughly 13,000 deals in the 12-month period ending Nov. 15 last year was only slightly less than in 2019, according to recent PwC data.
While the M&A market has been resilient, it remains challenging on a number of fronts. Leveraging insurance capital can help increase the pool of potential buyers, improve bid prices and maximize proceeds to the seller’s estate and creditors, effectively fortifying the positions of all parties in the transaction.
Historically, distressed sellers, whether or not involved in bankruptcy proceedings, often look to negotiate transactions on an “as is, where is” basis. This can be a deterrent for many prospective buyers as they must take the business or assets as they are and from a seller who lacks the ability to provide sufficient indemnification.
Transaction insurance, including Representations & Warranties Insurance, Tax Insurance, Litigation Insurance, and Contingent Liability Insurance, however, can provide buyers with indemnification protection for a range of liabilities for which they would not otherwise have recourse, which often leads to an expanded pool of buyers and better valuations for sellers. These may include liabilities related to the condition of the assets being acquired, financial statement inaccuracies, non-compliance with laws and certain intellectual property and tax liabilities, among others. Such liabilities often survive the free-and-clear sale order issued by the bankruptcy court. Transaction insurance, however, can often fill such liability gaps by offering coverage around these exposures.
Tax Insurance can also be used to insure certain tax positions taken by the seller. While conducting due diligence on a target company, a buyer may discover it will inherit a potential tax exposure through an acquisition. A tax insurance policy can insure a tax position similar to a private letter ruling from the IRS.
Contingent Liability Insurance is another form of risk mitigation often considered in distressed transactions. For example, litigation buyout insurance can be procured to insure against pending litigation in cases where a buyer might discover litigation that would survive the free-and-clear order or is simply not part of a bankruptcy filing.
Distressed M&A will continue to accelerate as the economy recovers from the COVID-19 pandemic, and companies look to reboot or revamp business models, re-evaluate core strategies, or explore new sectors. In such cases, risk doesn’t have to be a deterrent. With transaction insurance, buyers and sellers have a risk mitigation tool to facilitate the transfer of M&A liabilities and to create value in an otherwise challenging distressed M&A market.
Matthew Wiener is Managing Director on Aon’s Transaction Solutions team. Aon plc (NYSE: AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions.
