Collateral damage: Hidden deal breakers in insurance
TS insights: Vol. 6 No. 1, January 15, 2009
Collateral provided to insurers must be understood and managed
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Insurance collateral may not be the first thing dealmakers think of when they evaluate an acquisition candidate. However, insurance collateral provided to insurers by most companies with large deductible or similar insurance programs can be painful for an acquirer if it is overlooked or misunderstood. Collateral requirement increases over time can reduce a company's borrowing capacity. Unanticipated increases are a nasty surprise to acquirers ― especially private equity since private equity deals typically rely on debt financing.
Potential limits on borrowing should be uncovered early in the diligence process. The diligence team should explore strategies for lowering future collateral requirements after the deal closes and sponsors should make sure that company management regards insurance collateral as a priority. Given the difficulties in securing financing, it pays to be aggressive in managing collateral provided to insurers.