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Buying distressed assets may save troubled businesses

With the number of Australian companies entering into administration now at a staggering 8,300 at the end of 2008, these sales could be the way to go for many troubled companies. Distressed assets could be the ideal solution, especially where distressed investors have the ability to provide much needed capital to allow the restructure to take place.

17 July 2009

Distressed asset sales could become the saviour of many Australian businesses. In the right circumstances these sales can present an ideal investment opportunity for astute investors and assist troubled businesses, at the height of the current economic downturn.

Essentially distressed assets are assets sold by businesses which, for various reasons, are no longer financially viable for a company to maintain. In recent times, distressed asset sales in Australia have occurred across a range of sectors including property, banking and commodities.

Distressed asset sales are of interest to private equity buyers, corporate buyers, hedge fund managers and occasionally other competitors in the market.

The popularity of these assets is increasing and there are more of them around now than even a year ago, particularly given the spike in insolvency appointments which rose by more than 6% to 12,770. As the outlook for the Australian economy remains one of deep uncertainty, distressed asset sales will continue to increase in the financial sector, property market and commodities industry, which remain vulnerable to the effects of the global financial crisis. The global economic downturn is without a doubt a key driver of distressed asset sales and these sales could continue to rise should economic conditions worsen.

Distressed debt could stabilize financial markets by allowing banks to release previously dedicated capital tied up in nonperforming loans, which then becomes available to lend to productive businesses creating a multiplier effect of money in the economy.

The sale of distressed assets would be of benefit to various parties including the owners of the business, management, and other key stakeholders, as it would free up balance sheets that may be currently compromised by distressed assets.

At the same time, distressed asset sales could provide opportunities to investors to buy assets at substantially discounted prices, particularly where the financial circumstances of the business requires a quick fix sale. Often the ideal purchaser will be overseas and finding the right buyer can even deliver value where that buyer will pay you for their synergies in the acquisition.

It is worthwhile noting that whilst the M&A market fell for the second half of 2008 with only AUD$57 billion worth of transactions, down by 10% from the first half of 2008, it may be that an increase in M&A activity will be supported by an increase in distressed asset sales in a number of sectors.

Already the number of corporate distressed asset sales, particularly those in the financial services industry are increasing. Companies such as Allco and Babcock & Brown have undergone significant restructures, and forced asset sales are also occurring in the property industry due to the high levels of gearing and falling property prices. For example, Brisbane based investor Cromwell Group recently announced its $166 million purchase of the Tuggeranong Office Park in Canberra from the Federal Government.

But while buying these distressed assets may appear to be an attractive opportunity for some, buyers do need to do their homework. For example, while there appears to be an increase in distressed mortgage sales in parts of Western Sydney, investors should be wary of jumping in to buy these types of properties, particularly if they have little knowledge of the area or information about prospective property market values. It could be the case that the bargain property you bought at a foreclosure sale was at the high end of the market and property prices will continue to decrease due to other property foreclosure sales in the same area also taking place at a later point in time.

Of course, people could go wrong with distressed assets, but a private investor could perhaps mitigate some of the risk by acquiring units or shares in a fund manager geared towards the acquisition of distressed assets. In other cases, detailed financial analysis and due diligence should take place before acquiring these assets.
So investors do need to be careful. The best way to mitigate risk is to consult an advisor who can assist in determining the best discounted price of the distressed assets and also calculate the future returns on the investment.

By David Kenney

David Kenney is a Partner in charge of Corporate Services, with Hall Chadwick Accountants and Business Advisers, Sydney.

Working since 1986 in both medium sized and Big 5 Chartered Accounting firms, David provides the firm with all round skills in the areas of audit and taxation.

A regular presenter of business and taxation seminars both in-house and as a guest speaker at the State Chamber of Commerce, David has led small business workshops for a number of years.

Hall Chadwick is one of the largest and most experienced accounting groups in Australia, servicing clients in major capital cities and many regional centres in Australia. Nationally, Hall Chadwick is an association of independent firms that can combine the experience and skills of many partners and staff.

www.hallchadwick.com.au

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