The post-pandemic anxiety on the European markets was largely due to the anticipated wave of bankruptcies. High interest rates, surging energy prices and out-of-control inflation took their toll on many European businesses. Although the doomsday scenario did not come to pass, we have been seeing increasingly more restructurings and insolvencies. The Polish market is no exception. Currently, with more stable interest rates and restored investor confidence, distressed assets sales may seem like an attractive way to deploy capital. 

Distressed M&A involves divesting and purchasing assets, businesses or companies in dire straits. The definition of “distress” can range from early-stage talks with creditors, through restructuring negotiations, to formal restructuring or insolvency filings. Parties to distressed M&A deals face unique risks and opportunities. The upside is the opportunity to purchase a solid business with temporary liquidity issues at a very competitive price.

The Polish distressed M&A market is quite behind Western Europe, both in terms of value and volume. Seeing as there are rather few restructurings and insolvencies, it stands to reason that there are also few specialised market players, and, therefore, not too many funds that operate in the distressed M&A market niche in Poland. So far, Polish banks – known for their aversion to risk – have been showing little interest in financing distress M&A deals in connection with pending restructurings, however, alternative debt providers have been increasingly willing to participate. Some W&I (warranty and indemnity) insurers have also been willing to underwrite such transactions.

According to the most recent forecasts, the Polish economy is likely to experience a downturn, which may result in more insolvencies. The numbers seem to corroborate that – 371 insolvency and 4,430 restructuring proceedings opened in 2023, compared to 308 and 4,157, respectively, until the end of Q3 of 2024[1]. Possible adjustments of commercial real property prices also come into play here. These factors may be the harbinger of more distressed M&A deals in the years to come. The budding distressed M&A market in Poland offers unique opportunities to investors and service providers. 

How a distressed M&A deal is framed in legal terms depends on when – amid the target’s restructuring – the investor steps in. There are two types of proceedings in Poland: insolvency (governed by the Insolvency Act) and restructuring (with 4 distinct types of proceedings, governed by the Restructuring Act). While insolvency’s objective is to liquidate the debtor and sell its assets, restructuring aims to preserve the debtor and safeguard the creditors’ interests. Investors looking for potential targets may avail themselves of the publicly available electronic database (the National Debtors Register), where they will find all the insolvency and restructuring applications.

Under the Insolvency Act, it is possible to have a pre-pack transaction, whereby all or some of the debtor’s assets are sold to a buyer of choice at a pre-arranged price. Pre-packs are negotiated before the target company enters into formal insolvency, but the sales is only effected once the company has declared insolvency and the court has approved the sales terms. The main advantage is that the buyer acquires the assets free of any liens or encumbrances. Continuity of operations is also ensured. See our previous blog for more details about pre-packs in Poland. Time is the biggest obstacle faced by pre-packs in Poland, as it often takes up to several months for a transaction to go through the required court approvals. If the target company is undergoing formal restructuring, the process might be even longer, because the restructuring proceedings must be formally discontinued before a pre-pack application may be filed. The buyer and the seller must come to an arrangement before filing for insolvency, therefore this is not an option for investors looking for potential targets in the pool of companies already declared insolvent.

The other approach for investors is to wait for the insolvency estate to be sold by the court-appointed receiver – the price may be good, but the sales will be even further postponed.

As follows from the numbers above, the insolvency to restructuring ratio is 1:14, indicating that the latter is gaining importance. Thus, interested investors may seek to invest in the course of such proceedings.

During restructuring, the debtor is protected against enforcement, which offers the interested party the convenience of negotiating a satisfactory deal. The Restructuring Act is much more flexible than the Bankruptcy Act, and investors may structure the transaction more to their convenience. One solution is for an investor to offer, in the course of the proceedings, to finance the debtor’s reorganisation and provide capital for repaying reduced debts in exchange for the debtor’s shares or assets, if a satisfactory settlement is approved regarding debt reduction. If the debtor is unable to reach a satisfactory settlement with its creditors, then the investor may walk away from the deal. Alternatively, an investor may seek to purchase the assets during restructuring (such acquisition being free of any liens or encumbrances) – this solution is similar to a pre-pack under the Insolvency Act. Some investors prefer to purchase creditors’ reduced claims and then convert these into shares of the debtor, thus taking over a stake in the debtor at a reduced price.

The Polish distressed M&A market is still underdeveloped. Though the Polish economy has proven much more resilient than other EU economies, the number of insolvencies and restructurings is still on the rise. This may offer investors willing to consider distress M&A transactions certain opportunities. The Polish legal system already has the legal mechanisms to effect such transaction, and the service providers, e.g. W&I brokers, are increasingly willing to underwrite distress M&A deals. Thus, the scene seems to be set for more distressed M&A transactions in the Polish market.

[1] Data provided by COFACE, excluding consumer bankruptcies