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Insuring Distressed M&A

We are the only team in the transactional risk market in Europe who were placing transactional risk policies during the global financial crisis of 2008/9.

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What is distressed M&A?

Distressed M&A involves acquiring financially struggling companies facing imminent cash shortages. Buyers seize opportunities to provide liquidity relief through transactions, pre or post-bankruptcy, ensuring the target’s survival.

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Mitigate risks

The perceived higher risk in these deals influences pricing and terms, as insurers carefully assess the provision of standard financial, operational, and title warranties. Despite the advantages of Warranty & Indemnity (W&I) insurance in solvent businesses, its application in distressed transactions is restricted by limited market appetite and understanding. In today’s challenging economy, special situations strategies are affected, underscoring the importance of insurance for advisors and involved parties.

Distressed M&A Insurance considerations

For a distressed transaction to be insurable, consideration needs to be undertaken early on to see exactly how “stressed” the target business is, the following needs to be considered:

Disclosure/Diligence:

Due diligence and disclosure processes in distressed transactions are accelerated and may not match standard M&A processes. We offer strategic advice to overcome obstacles and address information gaps

Warranties:

Identify who is giving warranties and insurers coverage. We cover warranties from management or sellers for stressed targets, even with limited liability. Synthetic warranties are an option for insolvent transactions where traditional warranties are unavailable.

Involvement of Management/Sellers:

Ensure management is incentivised for a robust Q&A and data room, which is crucial for insurer confidence.

Loss:

In distressed scenarios, traditional loss calculation may not apply. We innovate by factoring in debt and assets to determine the basis loss for a breach of warranty.

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What our clients say

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“A smooth W&I process on our transactions, whether acquiring or divesting, is paramount for LDC as an investor. We regularly work with the Paragon team, where given the choice, because their expertise and in-depth knowledge of the M&A insurance market enables them to achieve fantastic results in tight timeframes.”

LDC Group

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“Their strong knowledge of how insurance solutions fit into M&A processes is second to none and the team has consistently provided invaluable contributions through the underwriting and policy negotiation phases showing their commitment to understanding the assets and specific issues involved.”

Kirkland & Ellis LLP

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“As an M&A adviser we are always looking for partners who can assistant in reducing friction and complexity in transactions – helping to keep the focus on what really matters most to our clients. Having worked with a range of brokers in the space, the team at Paragon is a clear standout in developing fit-for-purpose insurance solutions and being trusted to deliver what they’ve promised. They are a pleasure to work with.”

Deutche Bank

Insuring Distressed M&A FAQ’s

How is distressed debt valued?

Distressed debt is typically sold at a minimal fraction of its par value, providing a return approximately 1000 basis points higher than the risk-free rate. This reflects the high-risk, high-return nature of distressed debt securities, considering the elevated likelihood of default due to the issuer’s financially distressed position.

What does M&A insurance cover?

M&A insurance covers losses or liabilities stemming from undisclosed or unknown issues and indemnities. Essentially, the insurer assumes the role of the party making contractual promises. Each policy is customised to align with the unique requirements of a transaction.

How does distressed M&A differ from non-distressed M&A?

Unlike non-distressed M&A, typically bilateral between buyer and seller, distressed M&A involves multiple parties. Lenders, creditors, customers, and other stakeholders may play crucial roles, especially in in-court transactions with the involvement of the bankruptcy court.

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