Special Situations Investors
Special situations investors relate to a pool of capital that is not encumbered by restrictions around what they can and cannot do. They will look at situations that make sense from a risk / return perspective but for various reasons (complexity, tenor, geography) are outside what traditional investors can get comfortable with. These investors target returns north of 15% as they are funding unique scenarios that other lenders cannot.
In Australia and New Zealand, special situations funders are split into two categories:
- Asian Credit Funds: For cheque sizes north of A$15m the Asian credit funds represent the largest and most active pool of capital
- Australian and New Zealand Family Offices: For special situations transactions in the $5m to $15m space local family offices with fixed income allocations are the most likely source of capital
Special Situations - Resources
The client was a timber saw mill and processing company that had an opportunity to acquire a large plantation timber site at a favourable valuation of $65m. The company’s existing lender was a big 4 bank that would not allow any further debt to be drawn. The owner also did not wish to dilute their existing equity holdings. The target asset was strategic and the existing saw mill was largely reliant on this plantation for ongoing supply.
Neu Capital through a competitive process was able to source a special situations lender. The incoming lender was able to structure a facility to a standalone special purpose vehicle (SPV) that was used to acquire the asset with minimal equity injection. A contract was entered into between the company and the SPV for the ongoing supply of timber including a put/call option to acquire the land at a future date. Contractual minimum payments in the contract were sufficient to cover interest and principal amortisation meaning the incoming financier was first ranking against the plantation timber asset but retained unsecured recourse to the company for the remainder of the facility.
Some of the scenarios that special situation lenders will consider are as follows:
- Distress: Funding company restructures through Deeds of Company Arrangements (DOCA). Lenders in this scenario will pre-agree a funding commitment that will be provided following the formal appointment of an administrator to the company. This formal appointment will allow the company to address unsecured creditors and unprofitable contracts enabling a return to solvency. These situations are extremely complex.
- Contract Funding: Where there is a specific contract with a high-quality counter-party then funding could be provided specifically against the fulfilment of that contract with a payment direction to the incoming financier. This style of funding is particularly useful for smaller companies who have disproportionately large customers. This is not to be confused with invoice financing which is the factoring of an irrevocable receivable. In these circumstances the contract itself will still need to be fulfilled and can be a multi-year arrangement.
- Bridge Funding: This is short term funding (typically less than 6 months) that can finance a company until a specific refinancing event occurs. This is typically to do with a M&A activity or a capital raise. Getting comfortable with the refinance is the most important element in these type of lending arrangements.
Special situation lenders can move very quickly however operate with very low internal resources. Typical teams consist of only two to three people and therefore they will assess and reject opportunities very quickly. It is therefore very important that prior to approaching these lenders you have your information together in a considered well thought manner with particular attention given to the downside risks and collateral protection in your proposal.
We discreetly match established worldwide companies with over 400 domestic and overseas private equity investors.
We work with established companies with over $10m revenue looking for debt or equity between A$5m and A$200m.