By Joshua Finley

Juan Espinoza, a global special situations investor, has built a successful career spanning various asset classes such as equities, credit, and special situations investments. Espinoza brings a unique perspective to the table, underscored by his experience in identifying and capitalizing on transformative corporate events and credit dislocations. His unusual background, which combines a mix of equities and distressed credit investing, has allowed him to assess opportunities that require a  deep understanding of various business models and intricate capital structures, making him a thought leader in special situations investing. This article taps into Espinoza’s insights to explore three pivotal strategies to prepare for a possible economic downturn, offering readers a glimpse into the mind of a seasoned investor who has weathered the storms of various economic cycles with resilience and foresight.

Understanding Special Situations Investing

Special situations investing focuses on opportunities arising from significant corporate events such as mergers, acquisitions, or credit events like financial restructurings and bankruptcies. For instance, Disney’s 2019 acquisition of Twenty-First Century Fox represented a major strategic push for the buyer that propelled it further into both the content production and video streaming businesses. This $71 billion transaction is considered a “special situation” because it was transformational for the buyer and seller and had a major impact on the shareholder value and the future of Disney and Fox. Similarly, when JC Penney filed for bankruptcy in 2020 during the onset of the pandemic, the retailer created a complex scenario for its shareholders and creditors, which included suppliers, debtholders and landlords. Evaluating the upside or downside of these events for the various stakeholders requires a highly nuanced grasp of business and finance that typically eludes the average investor. Espinoza has had the opportunity to develop a unique professional toolkit during his 20 year career which included tenures at prestigious firms like Wellington Management and Oaktree Capital.  Armed with a deep understanding of how this type of unusual scenarios need to be assessed and valued, Espinoza is able to capitalize on unique investment opportunities, particularly in times of financial distress or structural change within a company.

Preparing for Difficult Credit Conditions

Early Action and Cash Conservation

“In the face of a difficult credit cycle, agility and prudence are your best allies.” 

Juan emphasizes the importance of cash conservation actions for industries like commercial real estate, which has been hit hard by shifts in consumer behavior, and reevaluating their own financial health promptly. “Procrastination is the enemy.”  

For creditors, early action is also a must.  A detailed portfolio review should provide an overview on the most problematic borrowers and, assuming the underwriting was sound, a pre-arranged solution should be possible particularly for senior creditors.  While each industry will have its own dynamics, those most affected by secular shifts in demand and high cost of debt are likely the most at risk. Even if interest rates decline over the next year, companies with a high debt burden are the most vulnerable as interest is essentially a fixed cost that won’t decline if the business downsizes.

Engaging Creditors Proactively

Early engagement with creditors to discuss potential adjustments in loan terms or to secure additional funding can make a significant difference. “The dialogue with creditors should start sooner rather than later,” advises Espinoza. Waiting too long to renegotiate terms can corner companies into unfavorable positions. “It’s about creating breathing room before the market tightens further. Proactive engagement can open doors to relatively favorable conditions that might not be available down the line.”

Capitalizing on Special Situations

Opportunistic investors can learn from the strategic approaches employed by special situations investors like Espinoza. Understanding the dynamics of special situations, such as valuing the impact of a transformational acquisition or navigating through financial restructurings, can provide a roadmap for innovative financial strategies during economic downturns. This entails a comprehensive understanding of the market and the ability to foresee and act on shifts in the financial landscape effectively. “Special situations require a special mindset. It’s not just about investing; it’s about strategically positioning yourself to deploy capital when others are afraid and confused.”

Conclusion

As the economic horizon shows signs of possible turbulence, borrowers must adopt a multifaceted strategy that includes early action, proactive creditor engagement, and creative financial solutions inspired by special situations investing. Drawing from the experiences and strategies of seasoned investors like Juan Espinoza offers valuable lessons in resilience and adaptability. By preparing in advance and adopting a strategic approach to liability management, borrowers can navigate the challenges of an economic downturn more effectively, positioning themselves for recovery and growth as market conditions improve.  Opportunistic investors can also benefit from a special situations approach, provided they have built the proper skillset to deploy capital in complex scenarios that are likely not suitable for the average investor.

Published by: Holy Minoza