Adjustments to COGS – E.g., Above-Market Rates from Suppliers/Vendors.Professional Fees (e.g., Restructuring Costs, Legal Fees, Turnaround Consulting).Since reorganizations include numerous non-recurring expenses, those must be treated as add-backs to “normalize” EBITDA (to arrive at a “run rate” EBITDA) – if not, the value of the debtor is going to be significantly understated. Recall that the “run-rate” EBITDA reflects a normalized cash flow metric. Since the assumption is that the debtor will continue operating into the foreseeable future, traditional valuation methods can be used. Usually, a “going concern” valuation is predicated on the projected EBITDA of the debtor and valuation multiple derived from trading comps analysis and a discounted cash flow model (DCF). Under the guidance of restructuring advisors like turnaround consultants, the debtor implemented operational changes that improved its cost structure, working capital management, etc.From the restructuring, the balance sheet of the debtor was “right-sized” and its misaligned capital structure was fixed (i.e., reduced debt burden).The debtor formulated a viable reorganization plan that passed the creditor vote, obtained confirmation, and properly executed the strategy to return to operating on a sustainable basis. ![]() Under the “going concern” recovery analysis, the general assumptions are: One of the most challenging tasks for creditors in Chapter 11 bankruptcies is gauging the impact of a reorganization on the valuation of the debtor.Ĭreditors in Chapter 11 valuing the debtor on a “going concern” basis are trying to predict the resulting valuation of a debtor post-restructuring – which is a byproduct of the reorganization plan the debtor put together using the guidance of its restructuring advisors, turnaround consultants, and related professionals. We’ll now move to a modeling exercise, which you can access by filling out the form below. Liquidation Value Calculator – Excel Template In effect, the best interest test in Chapter 11 establishes a “floor valuation” to protect the recoveries of impaired creditors. If the estimated plan distributions post-restructuring exceed the hypothetical recoveries under a liquidation, then the creditors are deemed better off. To obtain confirmation, a proposed reorganization plan must pass the “best interests” test, which tests if the reorganization value is higher than the liquidation value. Liquidation Value in Restructuring Recovery Analysisįor a plan of reorganization (POR) to receive confirmation from the Court, a liquidation analysis must be performed to compare potential creditor recoveries post-restructuring with the recoveries received under a hypothetical liquidation. Chapter 7: In contrast, the latter views the situation as too dire for a turnaround to be feasible and that liquidation would in fact result in the most value for all stakeholders.Chapter 11: The former is filed under the impression that the debtor can re-emerge as a “going concern” after restructuring. ![]() The difference between the two forms of bankruptcies, Chapter 11 and 7 is as follows. Or in some cases, an attempted reorganization might turn out to be far more challenging than originally anticipated, warranting conversion to Chapter 7 – but not without incurring significant fees in the process and reducing creditor recoveries. However, there are times when filing for Chapter 7 is the most appropriate decision. In comparison, Chapter 7 liquidations have historically resulted in substantially lower recoveries. Bankruptcy Code, there is a strict order of claim recoveries based on differing priorities set by the absolute priority rule (APR), which must be followed when filing for liquidation or reorganization.Ĭhapter 11 restructurings are usually the preferred option by both the debtor and creditors because of their track record of higher recoveries. On the other hand, a “going concern” valuation is a function of the projected enterprise value of the post-reorganization debtor. The recoveries of claims under a liquidation are compared to the recoveries of claims after a reorganization to confirm that the recoveries from the reorganization are in excess of the liquidation value.įor a liquidation analysis, the output is based on the dollar value of assets belonging to the debtor and recovery rate assumptions of those assets as a percentage of their book value. Liquidation Value refers to the method of approximating a valuation range of a debtor in order to measure the estimated recoveries of allowed claims.
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