September 5, 2023
Distressed Deals: Transactional Risk Insurance
A recent Willis Towers Watson blog says that both debtors and potential buyers of distressed assets should consider using R&W insurance and the other transactional insurance solutions which have become staples of private M&A deals in other contexts as an alternative to traditional risk allocation for their transactions. In addition to addressing the benefits of R&W insurance in a Section 363 bankruptcy sale, the blog also reviews the potential advantages of tax and contingent risk insurance. Here’s an excerpt:
Tax Insurance. Tax insurance can assist lenders, creditors, investors, partners, and owners with structuring and securing bespoke tax insurance policies for a wide range of tax risks involving distressed businesses. The tax code provides many favorable tax laws utilized by distressed and bankrupt businesses to avoid triggering a significant tax bill. Many of these favorable tax laws contain subjective elements that businesses need to comply with, but the IRS has not provided sufficient guidance on how to comply, resulting in uncertainty. Tax insurance provides that certainty and protects the tax savings, credits, and refunds generated by distressed or bankrupt businesses, which may bolster the value of the business for sellers. Additionally, buyers should always consider tax insurance to protect their investment from a liquidity event following an adverse IRS audit and protracted litigation.
Contingent Risk Insurance. Contingent risk insurance—which covers known risks presented by legal and regulatory exposures—has a range of applications in bankruptcy. Credit investors and litigation funders have increasingly purchased litigation claims from distressed sellers, and contingent risk insurance can be used to drive up the price (and, from the buyer’s point of view, lower the risk) of those assets. And for debtors facing pending or threatened litigation, contingent risk insurance can ring-fence the risk of an adverse judgment and cap the debtor’s liability—protections that are invaluable for bankruptcy buyers.
The blog says that carriers are looking for new opportunities in the changing M&A environment, and the use of transactional insurance in distressed transactions is one key example. As a result, the blog says that Willis expects to see greater flexibility and innovation as underwriters “strive to meet the needs and challenges that distressed investors and insolvent companies face.”
– John Jenkins