Finding Opportunity in Uncertainty: A Cross-Disciplinary Look at Distressed-Asset Transactions

In today’s volatile economic climate, market corrections, liquidity shortfalls, and shifting sector dynamics are forcing companies into urgent decision-making — and for prepared investors, this creates not just risk, but high-upside opportunity. While some may default to caution, the ability to execute on distressed transactions with speed and precision can lead to superior risk-adjusted returns — if you understand the complexities that drive distress and the deal structures that preserve value.

What’s Driving Distress Today?

Distress is rarely monolithic. It takes different shapes across industries, asset classes, and capital structures. But several current macro and sector-specific trends are surfacing actionable opportunities:

• Higher Interest Rates. The aggressive rate cycle has disrupted balance sheets and triggered debt service defaults — especially among leveraged portfolio companies and asset-heavy operators in capital-intensive industries like transportation, energy, and industrial services.
• Inflation Compression. Margins have narrowed across sectors where cost increases can’t be passed downstream — notably in consumer-packaged goods, logistics, and construction-related services.
• Tariff & Trade Pressures. U.S. tariff policies are, directly or indirectly, impacting almost every sector of the United States economy. The survival of many small or medium-sized businesses will depend on how long the tariffs remain in place and the ability of these businesses to pass along costs to the end customer.
• CRE Sector Dislocation. Real estate-linked distress is accelerating in office, multifamily, and other sectors, particularly in urban cores with lagging post-COVID recovery. Industrial outdoor storage (IOS), warehousing, and data centers remain more stable but are showing cracks given market uncertainty, competitive pressures, and construction costs.

Structuring Distressed M&A: Tactics That Work

Distressed deals move faster, carry heavier execution risk, and demand more creative structuring. To win in this space, conventional M&A reflexes need recalibration:

• Due Diligence Must Be Surgical. In addition to uncovering liabilities that “run with the assets,” distressed due diligence should focus on revenue durability, contractual assignability, workforce continuity, and change-of-control risk — all within compressed timeframes. Fraudulent transfer exposure and other clawback risks and successor liability (direct and indirect) must be specifically underwritten.
• Deal Architecture Is Everything. While asset deals often provide a cleaner liability shield, the right structure depends on tax attributes, intellectual property ownership, consent requirements, and business continuity. Hybrid structures — including divestitures with transition services or sales through affiliate entities — are increasingly common.
• Stakeholder Management Is Make-or-Break. You’re not just negotiating with a seller — you’re often navigating secured lenders, critical vendors and customers, bondholders, and sometimes a monitor or trustee. Experienced counsel can help neutralize blockers and build consensus, especially in informal workouts or contested sales.

Section 363 Sales: A Bankruptcy-Based Advantage

For buyers comfortable with judicial process, Section 363 of the Bankruptcy Code offers an accelerated, court-supervised path to acquiring assets “free and clear” of liens and legacy obligations.

• Stalking Horse Leverage. Bid protections like breakup fees, minimum overbids, and expense reimbursement are not just perks — they’re strategic levers that allow buyers to shape auction dynamics and de-risk early entry.
• Value vs. Certainty Trade-Off. Early-stage 363 buyers often achieve better pricing but must stomach more execution risk (regulatory objections, alternative bidders). Later-stage buyers gain certainty, but at a premium.
• Judicial Shielding. A court order approving a sale significantly insulates buyers from successor liability and fraudulent transfer claims — a powerful protection not always available in out-of-court deals.

Real Estate Distress: Playbooks Beyond the Obvious

Real estate-specific distress requires sector fluency, not just M&A chops. We’re seeing sophisticated buyers employ:

• Pre-Foreclosure Deals. Early engagement with over-levered borrowers can create solutions before the asset is publicly marketed or embroiled in litigation — and often at a discount to market.
• Note Purchases. Acquiring the underlying debt allows a buyer to dictate terms, cure defaults, or foreclose — often more efficiently than negotiating a direct purchase with a stressed or uncooperative owner.
• Receivership Sales. In judicial foreclosure or lender-driven disputes, a court-appointed receiver can stabilize operations, maintain cash flow, and create a cleaner handoff to the buyer.

Article 9 Sales: Efficient But Underused

UCC Article 9 sales — foreclosures on personal property (typically business assets) — remain underutilized tools in middle-market distress. When executed properly, they offer:

• Speed. Notice periods as short as 10 days mean transactions can close in weeks, not months.
• Lower Cost of Execution. No court supervision means lower fees, fewer stakeholders, and faster transitions — though reputational and title-risk concerns must be actively mitigated.
• Strategic Optionality. Buyers can influence timing and process while preserving relationships with the seller, management, or key employees — especially when transitioning the business post-sale.

Execution Matters: Distressed Deals Are Not DIY

The best outcomes in distressed transactions come from teams that are cross-functional, agile, and experienced. Here’s how top-tier investors consistently win:

• Assemble the Right Team Early. Legal, tax, valuation, and operational advisors must work in parallel, not sequence. Fragmented execution is a killer in distressed deals.
• Pre-Bake the Capital Stack. Sellers and their advisors won’t tolerate financing contingencies. Committed equity, bridge solutions, and flexible structures (e.g., convertible debt or rollover equity) separate contenders from time-wasters.
• Discipline Over Emotion. Not every distressed asset is worth pursuing. The best investors walk away more often than they close. Patience, not urgency, is the differentiator.

Conclusion: Converting Dislocation Into Value

Distressed investing is not a game of chance — it’s a process that rewards preparation, judgment, and speed. Whether through judicial mechanisms like section 363 or receiverships, creative out-of-court solutions, or overlooked tools like Article 9, the market is full of opportunities for those equipped to capitalize. At LP, we help clients not only spot those openings — we help them close them.

Join LP’s Kevin Slaughter and Harold Israel for a panel discussion, “Finding Opportunity in Uncertainty: Unlocking Value in Distressed Transactions,” on Wednesday, June 11, from 7:30-10 a.m. at LP. Register here.