In addition to creating a national health crisis, COVID-19 has created valuation challenges—and valuation practitioner opportunities—related to bankruptcy and financially distressed companies.
The COVID-caused economic crisis is causing record numbers of companies—large and small, public and private—to file for either a Chapter 11 reorganization or a Chapter 7 liquidation. Even more companies are operating in the zone of insolvency, where debtor company management and director duties shift from shareholders to creditors.
Issues related to Bankruptcy Code Section 547 preferences and Section 548 fraudulent transfers involve consideration not only is the debtor company insolvent—but exactly when and why it became insolvent. Bankruptcy-related valuation issues include the value of secured creditors’ collateral, DIP financing, reasonably equivalent value determination for spin-off/rejection/other DIP actions, reasonableness of the plan of reorganization and cramdowns, and others.
In addition to these bankruptcy-related valuation issues, financially distressed companies encounter financial accounting issues related to fair value measurement tangible asset and intangible asset impairment considerations.
This presentation summarizes what valuation analysts need to know about bankruptcy and financially distressed companies during this COVID-related economic crisis.
Recognize the valuation considerations of such common bankruptcy issues as preference payments, fraudulent transfers, secured creditor claims, zone of insolvency, DIP financing, acceptance/ rejection of contracts, plan of reorganization, cramdowns, and others;
Identify the impact of COVID-19 on analyst due diligence and valuation development issues related to such issues as financial projections, financial statement normalization adjustments, expected long-term growth rates, and CSRP and other WACC components;
Identify and explain the impact of COVID-19 on the debtor’s ability to raise DIP financing, the debtor’s ability to spin off assets, the Section 365 rejection of inbound/outbound intellectual property licenses, the debtor’s operating cash flow during the DIP period, the company’s ability to achieve a plan of reorganization; and
Recognize and explain the differences between distressed company valuations for bankruptcy purposes and distressed company impairment analyses (fair value measurements) for GAAP accounting purposes.
CPA, CGMA, ABV, CFF, ENROLLED AGENT,
Willamette Management Associates