Have you ever heard the phrase “special situations financing” and wondered what it is? In finance, Special Situations investing is event driven corporate actions which potentially offer minimal risk, capital gains opportunities in a relatively short period. But what is Special Situations financing?

What is Special Situations Financing?

Special Situations financing is a form of funding that provides capital and financial solutions for firms interested in initiating or taking advantage of a specific corporate action. The event driven corporate action can be merger arbitrage, a spin-off, liquidation, divestiture, thrift conversions, or stub participation, to name a few.

Let’s look at some special situations investing examples to answer; what is special situations financing?

Merger and Acquisition Financing

Lenders and investors provided funding (capital) to facilitate the merger or acquisition of another firm. The capital can be short-term funding, such as a bridge loan, or long-term permanent financing used to consummate a leveraged buyout (LBO).

Distressed Debt Financing

A financially distressed company may receive financing from special situations investors. A firm facing imminent bankruptcy and tittering on the edge of insolvency will sell its distressed debt and securities at a discount to raise needed funds.

Restructuring Financing

Special Situations lenders offer financing to companies in the grip of restructuring. Company turnaround efforts may require funding for divestitures and lenders can provide debtor-in-possession (DIP) financing to augment operational improvements.

Asset-based Financing

Asset-based lenders precipitate special situations investing by providing funds secured by company assets such as real estate, patents, short-term securities portfolios, and inventory.

Event Driven Financing

Event driven financing is special situations funding structured for specific corporate actions like spin-offs, partial company acquisitions, shareholder activism campaigns, and recapitalizations. Usually, the events are unique and require complex, tailor-made financing solutions.

What is special situations financing? It is the funding or investment capital employed to take advantage of company-induced events offering potential profit from the mispricing of securities and/or assets.

What is the difference between special situations and private equity?

Special Situations and private equity differ in strategic objectives, focus, and approach.

Objectives

The objective of Special Situations investing capitalizes on mispricing and asset undervaluation precipitated by event driven corporate actions. Investment opportunities tend to be low risk due to information availability and potential gains materialize in a short period of time.

Private equity’s (PE) objective is to produce long-term capital appreciation through organic or acquisition growth of an ongoing concern. The investment horizon is longer and PE investors prioritize maximum returns through strategic accretive initiatives.

Focus

Special Situation investing focuses on capitalizing on the discrepancies between a firm’s intrinsic value and its current share price, served up by corporate events.

Private equity firms acquire controlling interest in companies to drive growth initiatives and affect fiscal metamorphoses to increase long-term company value. They are in the business of taking publicly held firms private or investing in private companies.

Approach

Investors in special situations employ an arms-length, flexible approach supported by their optimistic judgment about the closure of an event driven opportunity. Flexible investment strategies range from the forementioned to activist investing.

Private equity investors are hands-on and managerially participatory in implementing growth strategies, cost optimization, and operational improvements. Private equity strives to add value to their portfolio firms.

What is special situations financing? Special Situations financing is an integral funding source facilitating the short-term capital gains generated from the mispricing of specific corporate actions. It is the rocket fuel enabling the attractive rate of returns on special situations investments.