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A Guide to Distressed Asset Investing and Corporate Restructuring

By March 9, 2022June 17th, 2024Blog6 min read

India has enjoyed a decade-long bull market, which has been perhaps the longest any nation has experienced. However, one outcome of the extreme uncertainty and volatility on the market is the opportunity to get assets that were pricey in the past at a discount is once in a lifetime. It is also a rare chance to get above-market returns by putting your money in companies with a financial crunch. We are talking about distressed asset investing here.

The idea of the distressed asset investing program is to showcase the techniques and challenges to assist you in detecting and assessing investment opportunities for distressed assets. Distressed assets are quickly appearing in the marketplace of today. You need to sharpen your skills to identify encouraging opportunities in this attractive asset category by knowing how to determine a company’s value or near bankruptcy. You also need to realize how to distribute the value across various hierarchies of the capital structure.

If you are a leader at the senior level, it is possible that your organization is going through distress because of an economic crisis. It can also be due to a leveraged buyout. The distressed asset investing program is suitable for you then. It is easy to gain increased confidence and clarity while assessing your alternatives on your business’ financing and operating sides. It is also crucial to polish your awareness of the potential consequences and advantages of the restructuring choices available to the organization.

Distress asset investing program highlights

The following are some of the major highlights of this interesting program:

  • It will review the financial distress.
  • Foundations/basics of value investments if the environment is distressed.
  • Strategies to help investors, private equity, and hedge funds.
  • Distress causes – The risk of pathways and growth of restructuring.

Distressed asset investing program advantages 

  • Anticipate crisis symptoms in the financial statements of a firm.
  • Appreciate why and how an organization does not succeed and the process of turnaround.
  • Home negotiation skills for maximizing returns even when distressed situations are complex.
  • Investors will be aware of the roles of investors, managers, consultants, and advisors in restructuring debts.

What is a distressed asset?

First, you should understand distressed assets’ meaning. Distressed assets are the fixer-uppers of the world of commercial real estate. These assets are not performing as much as their actual potential is. The reasons can be mismanagement, physical condition, market factors, and so on. Therefore, distressed assets are available at a purchase price lower than their average value. 

The causes of distressed asset investing could be categorized in the distressed category can be quite diverse. However, the most common reason is economic or financial distress. It means the owner can be lagging behind their debt payments.

Distressed assets are a particular subcategory of the opportunistic risk profile. A sponsor that leads an opportunist transaction with financially distressed assets may purchase the property outright. Alternatively, they can buy the debt, which a financially distressed seller secures. All opportunistic projects do not initiate with a distressed asset. On the other hand, all investments by commercial real estate in a distressed asset are a part of the opportunistic bucket. Effective asset and business valuation services can make or break a deal.

Important points to be aware of investments in distressed assets

1. Appreciation

There was a discount on the initial purchase price, and so there is a high potential for appreciation. Therefore, the investors can enjoy the likelihood of a great return through distressed asset investing, although there could be low or nonexistent cash flow in the preliminary phases.

2. Discounted purchase price

The sponsor could be purchasing the debt or actual property. Irrespective of that, distressed assets usually trade lower than the market value of a stabilized asset.

3. Legal costs

Buying debt for acquiring a property using a foreclosure can be accompanied by substantial legal expenses or risk of borrower bankruptcy.

4. Business plan

You need a strong business plan to stabilize the distressed assets. Unaddressed problems like disgruntled tenants and deferred maintenance reluctance to take ownership of a distressed project can affect a project’s timeline and the final cost.

5. Due diligence

Often, distressed asset investing requires a lot of effort to allure the end-users. Typically, sellers give away distressed deals to purchasers with the ability to close promptly.

6. Valuation of distressed assets

Business and asset valuation is also an important criterion for investing in distressed assets.

Recommended, Implications of Investing in Distressed Assets in India

The buyer should focus on these parameters for distressed asset investing.

The expertise and the ability of a sponsor to develop and implement a business plan are crucial for a distressed asset investing project to succeed. There are so many threats, and you need to collaborate with somebody who is aware of your expectations and is able to explore the possible pitfalls. It is also important to closely monitor the track record of the sponsor so that you can assess the ability of the sponsor to implement their plan of distressed asset investing.

Find out whether they have earlier experience of such deals or not. What were the results of their past projects as compared to their initial plan? Thus, it is imperative to pick a project from a sponsor who has previously shown excellent results. These sponsors are able to handle the complexities associated with distressed opportunistic deals easily. When you follow all these tips, you will have increased opportunities for success in dealing with distressed assets. Make sure you take the help of reputable valuation services for the valuation of distressed assets in India.

RNC is a well-known and respected name in providing techno-commercial services such as Valuation Consulting & Allied Services, Insurance Survey & Loss Assessment, Insurance Advisory Services, and Corporate Finance & Deal Advisory Services.