HedgeTalk: Grappling over Valuations
By: John Trefethen, Director & Co-Founder
Valuation is a critical and indispensable element of the bankruptcy process. The COVID-19 crisis has added a layer of complexity and uncertainty to bankruptcy issues with respect to valuing assets and liabilities. Estimates embedded in income statement and balance sheet line items have become unreliable making it harder than ever to determine what a company might be worth.
This current complexity in valuations is not necessarily due to any underlying economic issue, but rather a health crisis. How temporary the crisis will be is anyone’s guess, but it has already lasted longer than many thought it would. As a result, challenging valuations will be increasingly important as bankruptcies continue to occur. The table below highlights the number of weekly bankruptcies that have occurred since April of this year for companies with total liabilities that exceed $50 million.
With creditors and debtors each armed with their respective models, the current environment has introduced significant differences in valuations. In one case, the hospital chain Quorum received total company valuations from two different parties that differed by nearly 50%, a difference that was over $400 million. With differences that significant and the amount of money that can be at stake, valuation litigation is beginning to surface.
One party feeling slighted in the current bankruptcy valuation paradigm are lenders with subordinated credit positions. When lenders with senior liens arrive at valuations that are low relative to expectations, lenders with subordinated positions can be left short-handed – unable to recoup their investment. There have been concerns, and resulting litigation, where subordinate lenders feel that senior lenders and companies have "low-balled” valuations to the detriment of the junior creditors.
It is important now more than ever that all interested parties in a bankruptcy determine their own valuations. With far less certainty, the opportunity to influence a valuation is greater than ever. Being represented by an experienced valuation agent can help ensure your best interests are met. In addition, working with a valuation expert that maintains integrity in its valuation methodologies can help a company avoid costly litigation. Valuation has always been viewed as much of an art as it is a science. With so many unknowns - the likelihood of future federal stimulus, the length of the pandemic, and how quickly the economy will rebound post-pandemic, to name a few – it will be more important than ever for debtors and creditors to work with a valuation agent that employs a nuanced and flexible approach to valuation methodologies while maintaining a valuation process that is grounded in integrity and, if necessary, defensible in the event of litigation.
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