Securing Financing for Distressed Companies

Securing Financing for Distressed Companies

What is a distressed company?

Distressed companies are firms that have fallen on particularly difficult times and are now in dire need of liquidity. These are companies that cannot remain solvent by continued operations alone so must look for immediate external capital inflow to cover their current debt obligations.

Companies that find themselves in this situation typically have poor capital structures, declining profitability or imminent debt maturity. Understandably, creditors are reluctant to provide capital to these firms due to the perceived risk associated. However, the pandemic created a situation where companies in several industries with strong operating models struggled to stay afloat due lockdowns, increased safety measures, or supply chain disruptions.

How do distressed companies secure financing?

These firms may still have some options as some credit providers are willing to provide financing to these companies for the right premium. Distressed debt is often held by investment firms and hedge funds. It can also be held by non-traditional investment funds, such as business development companies (BDCs). The advantage to these value investors and most firms experiencing cash flow problems this year, is that the market outlook for 2021 projects business to pick up steam and return to pre-COVID revenues by end of year. With sales growth for most companies expected to be in the double digits, we strongly believe that this market landscape presents attractive distressed debt opportunities.

Distressed debt typically trades at a steep discount to its par value (the payback amount of the loan). This discount can range anywhere from 20% to as much as 80% dependent on the firm’s probability of defaulting. This rate can be significantly reduced if firms grant these investors priority in their payback order. For creditors looking to secure these attractive yields, significant caution must be exercised; while distressed debt is usually high in priority during Chapter 11 bankruptcy negotiations, these dealings can often tie up capital for significant amounts of time and is still not guaranteed to return the full face value of the issuance.

Business valuations are partially dependent on the available demand for the opportunity, making access to a large net of potential buyers a key asset. At Beacon Advisors, we offer our clients exclusive access to distressed financing opportunities through our global network of over 10,000 bankruptcy trustees, creditors, business owners and investors.

Current and Historical Economic Climate for Distressed Debt

For the last few years, creditors have been hesitant to deploy capital due to expensive multiples and low return on investment. This trend has remained even for firms that maintain high dry powder reserves (liquid assets). Multiples, the difference between issued capital and a firm’s recent returns (revenues/profits) are key determinants in securing an attractive price for a financing request.

Going forward, with the Canadian Overnight Rate at all-time lows and the Conference Board of Canada’s expected Real GDP growth of 5.3% for 2021, we expect creditors to reconsider their reluctance to engage with distressed financing as high-yield debt opportunities remain scarce. This should push multiples higher, and debt yields lower.

This is where Beacon Advisors comes in, to help you find the right deals, move forward with confidence and execute an effective strategy. Our experience in M&A and debt advisory allows us to source accretive acquisition opportunities for our clients keeping in mind their appetite for risk. Our network and experience in transaction advisory gives us deep insights into market conditions allowing us to better support clients in making informed decisions.

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