Toxic Debt and Financially Distressed Companies

May 12, 2021

by a searcher in Tampa, FL, USA

Curious based on your networks, do you come across financially distressed companies ($5M+ annual revenue) that have their debt exceed the value of the company and need that toxic debt fixed before becoming insolvent? Traditionally, I had steered clear and never considered these opportunities but am now thinking through solving that challenge for those in that space.

Any thoughts or leads would be appreciated.

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Reply by a searcher
from Columbia University in New York, NY, USA

There are a lot of turnaround firms that fill that role. And yes, there are many distressed companies that have far more debt than what the company would be valued at. That is typical of distressed companies, and is one reason why equity holders often get screwed in a bankruptcy proceeding. If you think you want to "fix" a distressed company, don't forget that they're distressed for a reason... often multiple reasons. It's rarely a quick fix.

Reply by an investor
from Hobart and William Smith Colleges in Dorset, VT, USA

Dan, how is this done without inviting claims of fraudulent transfer? "...Through the use of a special situation fund that acquires the debts of businesses that are crippled by it and then divorces the debt from the business". Divorcing the debt from the assets is clearly the brilliant move and for very good reasons there is about 7,000 years of case law forbidding it.

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