Skip to main content
Article

How M&A Insurance Can Help Investors Support Distressed Businesses

Mergers and Acquisitions
COVID 19 Coronavirus

By Alexander Keville , Vanessa Young , Nick Cunningham and Stefan Farahani | April 1, 2020

As COVID-19 continues to spread in Europe, the fear it has struck in public equity markets has now permeated private M&A too.

Looking back to pre-March 2020, we experienced a prolonged period of buoyant financial markets combined with a relative dearth of investment opportunities, which coalesced to form record levels of dry powder amongst private equity funds. However, that buoyancy is greatly diminished — whilst some deals are still being done, many deals are being delayed or are being pulled completely, across a range of sectors. In addition to the most obviously affected industries (e.g. aviation, hospitality and healthcare) we have seen deals in real estate, manufacturing and even pharmaceuticals being postponed or abandoned. Attention has turned to preserving value in portfolio companies and a laser focus on cash-flow management.

Stretched liquidity requirements will in due course likely lead to a focus on divestments, although at this stage it remains to be seen the extent to which that will be driven by equity sponsors or senior creditors. Special situation and distressed funds, on the other hand, will also be conscious of the low interest rate environment and the increased opportunities to deploy capital. Such investors will play a vital role; notwithstanding extensive government support that has been announced, their capital will be crucial to maintaining employment in certain sectors and geographies.

At some point there will be a robust recovery of M&A activity, although it is impossible to predict exactly when. What is a certainty is that the 2020 vintage deals will be different to prior years and, even with the promise of extensive governmental support, distress will likely be widespread.

Transactional Risk Insurance has traditionally shied away from distressed deals.

Transactional risk insurance has traditionally shied away from distressed deals - that will need to change. Insurers will similarly need to deploy capital to earn policy premiums and M&A underwriters’ appetite will therefore need to adjust. We have spoken to a range of insurers who are increasingly willing to insure transactions where either the seller’s or the target’s solvency is in question. Equally, on non-distressed deals we anticipate extensive insurer competition will drive pricing lower still.

If nothing else, the current market is characterised by uncertainty and deal-making will certainly be difficult. To help you or your clients weather these challenges, navigate uncertainty and preserve value in a difficult market, the WTW Transactional Risk team offer a suite of flexible risk transfer solutions to help facilitate special situations and distressed deals, by providing meaningful buyer recourse secured against top rated insurance capital.

Insurance solutions for distressed M&A

  1. 01

    Equity

    Nil recourse management warranty deeds and synthetic warranty and indemnity insurance

    In a distressed but solvent sale regular W&I insurance may be available if the seller is able to provide the buyer with warranties. However, in an insolvent sale the seller (or insolvency practitioner) may not be in a position to offer any warranties to the buyer. In such scenario, it may be that the incumbent management are willing to give some warranties on a nil-recourse basis (via a management warranty deed), with such warranties being insured. Otherwise, it may be that no warranties are given to a buyer. Some insurers will insure ‘synthetic warranties’ i.e. the insurance covers warranties which were deemed given by the seller to the buyer, even though no such warranties were in fact given. This provides a significant increase in protection offered to a buyer.

  2. 02

    Pricing

    Pricing will vary from sector to sector and for different geographies. For distressed operational businesses, pricing for insuring a management warranty deed would typically be in the range of 1.2% to 1.75% of the limit purchased. Pricing for distressed real estate transactions is typically materially lower than operational businesses at between 0.7% to 1.1%. In each case pricing for wholly synthetic cover will be higher and will be highly fact dependent.

  3. 03

    Fixed Income

    Loan portfolio insurance representations and warranties

    We have experience of insuring the warranties a seller provides a buyer on the sale of loan portfolios. To the extent such warranties are untrue it is not uncommon for the seller to be obligated to repurchase such loans. However, in a distressed sale such repurchase obligation may not be included and, in any case, may have little value if the seller is of weak credit quality. Insurers will expect to see reasonable due diligence being undertaken on the loan portfolio. Whilst the insurer would not be bearing the primary credit risk on the portfolio or data risks relating to the principal outstanding, they would be bearing the risk that the loans sold are otherwise not as described/warranted.

  4. 04

    Pricing

    Pricing will vary depending on the asset class, security under the loans, geography of the borrower, governing law and levels of distress in the loan portfolio. However, as a general steer pricing for this product would typically be in the range of 0.9% to 2% of the policy limit purchased.

Authors

Alexander Keville
Practice Leader Mergers & Acquisitions,
FINEX Global

Executive Director, Transactional Risks Team

Director of Tax and Investment Structuring, Transactional Risks Team

Associate, Mergers & Acquisitions, Transactional Risks Team

Contact Us
Related content tags, list of links Article Mergers and Acquisitions COVID-19 (Coronavirus)