Trolling the bankruptcy market for deals on brands or real estate? You’re not alone. Such so-called “vulture investing” can be a profitable path to growth and with bankruptcy filings occurring at a steady clip, one company’s distress is another’s opportunity. The trick is finding out about distressed companies before everyone else does, but a bit of informed sleuthing can yield plenty of clues.
Stock, debt trading trends
“In the public restaurant arena, the first thing to look at is stock price,” says Navin Nagrani, senior vice president at Hilco Real Estate, Northbrook, IL, which helps companies restructure their real estate assets. “You can also watch companies whose debt is publicly traded. It’s a bit more difficult to buy the debt behind a restaurant chain, but there are institutions that trade in it and you can track that activity. Like the stock price, if the debt is trading at a big discount it’s a sign of trouble.”
Loans on sale
While lenders typically can’t discuss borrowers’ financial performance, they can seek buyers of loans, says Rod Guinn, restaurant specialist at FocalPoint Partners LLC, a Los Angeles-based investment banking and financial advising company. “They may want to sell a loan if they know that there’s a problem coming up. So you can approach a lender not to say, ‘Who do you have in your portfolio that’s about to hit the wall?’, but rather, ‘Are there any loans in your portfolio that you’re interested in selling?’”
Nagrani adds that knowing investment bankers that specialize in financing restaurants is smart. “They’re typically working on a variety of transactions. Get to know them and you’ll be on their list to contact when they [have] distressed deals.”
Franchise networks can yield clues to a chain’s health, Nagrani suggests. “If you see frequent news about disputes and litigation, or begin to see unit closings, it could signal distress. You can also approach franchisees for leads to opportunities within their system, or talk to the people at corporate who do franchise sales. Even if the company and brand are healthy, there may be struggling franchisees,” he says. As many franchisees with limited credit try to complete upgrades or rebranding initiatives, focusing on this arena can be fruitful, Guinn adds.
While they may have some restrictions on information they can share, landlords are often more willing than other partners to talk about who’s paying their bills and who isn’t, says Guinn.
And like investment bankers, firms that handle lease restructuring for failing companies can be good sources. According to Nagrani, there’s often an opportunity for buyers to step into leases for nothing beyond assuming the obligations of the lease.
Vendors not getting paid on time is a sign of distress that typically leads to tighter credit terms. “For most suppliers, weak clients may get only 15, seven or even C.O.D. payment terms,” Guinn says. “Companies that use the same suppliers as competitors they’re interested in buying can get an idea through the supplier if the target company has had its terms tightened. Executives may not talk, but drivers and others with regular access to and knowledge of those accounts often do.”
Discounting and couponing work well at some companies and are ongoing strategic initiatives, but they can also be signs of distress. “If a company has never discounted before or they suddenly increase their couponing, they may be struggling,” Nagrani says. “Like anything else, it’s not foolproof. But it’s one more thing to look at.”
Angels: investors who provide capital to startups.
Vultures: investors who look for distressed properties.
Adventurer: angel who takes an active role in startups.
Dragon: angel who craves the spotlight over his investments.