What would be the plausible reason for targeting liabilities in an Asset Purchase?

The opposite scenario with the purchase of specific assets such as inventory or accounts receivable seems logical but what would be the logic for a firm to purchase specific liabilities in a company? Any examples would be greatly appreciated.

P.S. I know a lot of distressed funds target 'fulcrum' securities in the hopes of re-organisation post filing for chapter 11 but was curious about cases not such as this.

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Comments (7)

  • Anonymous Monkey's picture
  • Anonymous Monkey
  • Rank: Chimp
Jun 22, 2020 - 3:51pm

maybe they're trading at significant discount, have high probability of being recovered during the reorg progress due to priority and value of estate. Trade claims come to mind As a result, by investing in them, the DD firm can make a huge return

Jun 22, 2020 - 4:00pm

What kind of liabilities would fall into this category? Thinking it could potentially cover all bond/loan items depending upon the scenario. Would this ever extend to traditional operating liabilities? I can't see the value in that scenario

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Jun 23, 2020 - 9:00am

For insurance companies, the liabilities (the policyholder reserves) are the "operating" aspect of the company while the assets are often an afterthought. If you like a certain block of an insurance company you could either buy the block of policies or offer to coinsure a large percentage of it. Just in general, if you wanted to acquire an insurance company, most of the assets are marked to market, so you'd have to be excited about either the in-force liabilities or how the company was generating new business.

One interesting deal that happened while I worked in insurance was New York Life's acquiring John Hancock's Whole Life block where the primary purpose of the deal was actually bolstering NYL's life insurance reserves (at the time, there was concern that large annuity reserves -relative to life reserves- could lead to regulation as a SIFI which came with a number of relatively onerous tests).

Jun 23, 2020 - 9:44am
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