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How quickly things can change: From an environment of confident growth, record-low unemployment, and a booming stock market coupled with a low interest rate environment, deal making was poised to continue through the 2020 presidential election, and beyond. That was yesterday’s news. With the onslaught of the COVID-19 pandemic, the jobless rate has grown into the teens and recessionary indicators are displacing economic growth. In turn, many formerly healthy companies have seen revenues evaporate, cash reserves dwindle, and valuations impaired. Bankruptcy and restructuring professionals are already engaged in a new wave of activity spurred by the pandemic. Given the numerous opportunities across a broad range of industries that will arise for investments in distressed companies or their assets, this article will focus on the unique dynamics of navigating this universe and highlight some potential pitfalls for the unwary.

Identifying the Distressed Company. Opportunities for investments in distressed assets attributable to the COVID-19 pandemic are arising from a variety of sources, including reduction in publicly traded company equity values and the related cash needs of such companies, payment and covenant defaults in credit facilities, regulatory pressures, and general operational difficulties. As pandemic-related conditions persist, existing business models may simply be unsustainable. Investors experienced in identifying how to deal with these varied circumstances, as well as possessing the resources to fund these opportunities through previously established or new funds dedicated to distressed opportunities, will likely be the successful acquirers in this new paradigm.

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