An oil industry equipment manufacturer is struggling with crippling debt. Faced with certain bankruptcy, they decide to hire a boutique investment banking firm. Their hopes are wielded to the firm’s special situations investing expertise. But what exactly is that expertise, what is special situations investment banking?
What is Special Situations in Investment Banking?
Special situations investment banking are event-driven corporate actions in which investment bankers provide funding and advisory services to companies looking to capitalize on or successfully navigate an adverse corporate event.
Merger and acquisitions (M & A), spin-offs, and distressed debt investing are a few unique and complex, event-driven corporate actions. These situations are event-driven because they are initiated by corporate decisions (actions) and not reactionary responses to market trends.
What follows is an overview of investment banking’s participation in special situations investing and added context to the answer to; what is special situations investment banking?
Merger and Acquisition (M & A)
Investment bankers advise firms on contemplated, in-process and post mergers and acquisitions. They consult buy-side acquirers on potential target firms, financing structure, and post integration. On the sell side, bankers focus on finding buyers, negotiating terms, and may extend funding for companies looking to sell all or a portion of the firm.
Spin-offs
What are special situations investment banking? Spin-offs are a prime example. A spin-off is a corporate divestiture of a division of a parent company into a standalone separate entity. Special situations bankers advise firms on transaction structure, new common share issuance, regulatory and legal hurdles, and post-divestiture parent and spin-off valuation.
Distressed Debt Restructuring
Financially distressed companies undergoing bankruptcy and high debt challenges employ investment bankers to explore strategic options, restructure debt through creditor negotiations, liquidate assets, and raise desperation capital.
Capital Issuance
Banks raise capital for a myriad of reasons, such as to strengthen the balance sheet, replenish regulatory reserves, and support internal and external growth initiatives. Investors participate in new security and debt issuances, equity offerings, and private placements as forms of special situations investing.
Distressed Assets
Underperforming investments and non-performing loans can litter a bank’s balance sheet. Investors see these distressed assets and debt as opportunities to be purchased at a discount and look to profit from asset liquidation or market mean reversion.
Litigation Advisory
Corporations experiencing regulatory investigations and legal proceedings hire investment bankers to provide navigation assistance. They address the legal liabilities by assessing the fiscal and legal impact, negotiating settlements, and structuring financing for mandated judgment obligations.
Special Situations Financing
Raising capital is an important facility special situations investment bankers provide. They specialize in capital raises through mezzanine (bridge) financing, private placements, initial public offerings (IPO), distressed debt offerings, and asset-based financing.
Recapitalization
Regulatory metric underperformance, investment losses, and inordinately high depositor withdrawals can force a bank to undergo recapitalization or restructuring. Lenders and investors provide funding and precipitate debt restructuring to shore up sagging balance sheets and restore stability.
Regulatory Compliance
Regulatory requirements can cause sanctions and compliance enforcement action related to material audit conditions, reserve deficiencies, and risk management concerns. These challenges are closely monitored by special situations investors to assess the bank’s overall financial health and determine if these conditions are event driven catalysts.
Corporate Governance
Banking operations can be adversely impacted by management shake-ups, shareholder and environmental activism, and governance challenges. Investors with substantial security holdings may consult and collaborate with directors, board members, and management on accretive strategies to unlock shareholder value.
What is considered a Special Situation in Investment Banking?
A special situation in investment banking is a corporate-initiated event, an event-driven occurrence, that is the catalyst for investors to take specific actions related to the securities, debt and/or assets of the event firm. Investment banking special situations events include, but are not limited to the following:
- Merger and Acquisitions (M & A)
- Spin-offs
- Tender Offers – Tender offers occur when a company offers to buy their existing shares for current shareholders at a designated price.
- Distress Debt Restructuring
- Capital Structure Restructuring – Equity and debt issuances, recallable bond purchases, and share buybacks precipitate special situations.
- Shareholder Activism
- Litigation Advisory
- Special Situations Financing
What is special situations investment banking? They are the event-driven actions of corporations that require the corporate finance, capital raising, and regulatory and legal expertise of investment bankers to maximize value and mitigate losses.
Read Next:
