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Are their certain industry characteristics that define a 'distressed' company?

In general, whenever a company is unable to satisfy its creditors or claimants in whole, the situation engenders a host of restructuring and bankruptcy-related issues. "Distressed" does not necessarily mean hostile. Often, in a distressed transaction, the equity holders are well aware that their interests are out-of-the-money and try to work with the company’s creditors to reach a consensual transaction. This may especially be true for an equity sponsor that depends on the debt markets to finance its portfolio companies and wants to preserve its reputation with lenders. Typically, distressed M&A candidates possess a number of the following characteristics:

  • Significant liquidity constraints
  • Conflicts between the various constituents that hold claims or interests
  • Senior lender playing hardball and restricting capital
  • Declining operating performance and cash flow
  • Stretched payables
  • Changing industry conditions
  • Going concern value exceeds liquidation value
  • Face amount of debt and claims may exceed enterprise value
  • Covenant and/or payment defaults on debt instruments
  • Limited access to capital with current balance sheet
  • Often operating in Chapter 11