Actionable Ideas for Companies and Sponsors
Legacy Liability Sell-Side M&A Provides Finality for Corporate Defendants
Nearly $70 billion of long-tail corporate legacy liabilities are currently estimated to reside with corporations, primarily in the U.S. Much of this liability relates to asbestos, but other toxic tort claims and environmental accidents are also significant liability streams. Until recently, unless a defendant was willing to consider utilizing the U.S. bankruptcy system, there was no way for a legacy liability defendant to secure certainty and finality. Even meticulously planned prepackaged Chapter 11 filings, often surgical in nature, have not led to certainty as litigation and costs have led to unanticipated outcomes.
Legacy liability M&A allows corporates to divest such exposures to well-financed, thirdparty investment funds or insurance companies that specialize in acquiring such portfolios. Upon closing of the transaction, the purchaser fully assumes all the liabilities and full responsibility for the management and payment of claims so the corporate seller has no residual risk related to the legacy liabilities. As a result, the corporate stakeholders can focus management time and effort on running the core business, reducing volatility in the business and eliminating an overhang that often negatively affects performance in the equity markets.
Legacy liability M&A is generally a cost-effective solution, and a robust and active acquiror market has recently developed with acquirors looking to take advantage of potentially large pools of assets that can be invested for the long term. Over the past three years, there have been several notable legacy liability transactions and we expect activity to increase as corporate defendants take note of the success of these transactions and the benefits that can accrue.
Source: Legacy liability data from “Global Insurance Run-off Survey 2022,” PWC September 2022