Valuation Methodologies: A Judge’s View

posted in: Valuation | 0

Author: the Hon. Christopher S. Sontchi

There are a variety of methodologies to determine the value of assets that are routinely presented to bankruptcy courts: (i) asset-based valuation, (ii) discounted cash flow or “DCF” valuation, and (iii) relative valuation approaches, which include the “comparable company analysis” and the “comparable transaction analysis.”

This article explains in layman’s terms each of the methodologies and how they are used to reach a conclusion as to value.  An asset based valuation generally calculates the liquidation value of individual assets and aggregates them to arrive at a firm value.  DCF valuation calculates the value of any asset from the present value of expected future cash flows from it, which, in turn, rests on the proposition that a dollar today is worth more than a dollar tomorrow.  Relative valuation involves the pricing of comparable assets, standardized using a common variable such as earnings, cash flows, book value, or revenues.  The conclusion rests on the selection of the valuation metric, e.g., EBITDA, and the similarity of the companies or transactions used.  The conclusions from each of the methodologies are generally blended to arrive at a conclusion of value.

The article closes by noting that bankruptcy judges have become familiar and comfortable with the DCF, comparable companies and comparable transactions methodologies, which are often referred to as the “standard” methodologies.  Departures from the standard methodologies or how they are calculated must be explained to the judge.

This article was published in the American Bankruptcy Institute Law Review (20 Am. Bankr. Inst. L. Rev. 1 (2012)) and is available online here.

Bankruptcy Step Zero

Authors: Douglas G. Baird and Anthony J. Casey

In RadLAX Gateway Hotel, LLC v Amalgamated Bank, the Supreme Court’s statutory interpretation focuses on an emerging theme of its bankruptcy jurisprudence: the proper domain of the bankruptcy judge. While one might expect the Court to approach that question of domain as it has for administrative agencies, that is not the approach taken. This article explores the Court’s approach to bankruptcy’s domain. In doing so, we connect three principal strands of the Court’s bankruptcy jurisprudence. The first strand, embodied in Butner v United States, centers on the idea that the bankruptcy forum must vindicate nonbankruptcy rights. The second, most recently addressed in Stern v Marshall, focuses on the limits of bankruptcy judges in deciding and issuing final judgment on the issues before them. Bankruptcy judges must limit themselves to deciding issues central to the administration of the bankruptcy process. RadLAX is the continuation of a third strand that makes it plain that the Court reads ambiguous provisions of the Bankruptcy Code to narrow the range of decisions over which the bankruptcy judge may exercise her discretion — at least when the exercise of that discretion might impact nonbankruptcy rights. The resulting bankruptcy jurisprudence is in stark contrast with the Court’s approach in administrative law. This paper attempts to make sense of this state of affairs and connect it with the realities of bankruptcy practice today.

The article is available here on SSRN.

Bankruptcy and Economic Recovery

Authors: Thomas Jackson & David Skeel

A striking feature of the recent economic crisis was the long period of subpar economic growth that continued even after the crisis had officially ended.  Although discussion about how to spur economic recovery has focused on the efficacy of Keynesian stimulus spending, this is only one of many factors that might plausibly encourage growth.  For a book entitled “Financial Restructuring to Sustain Recovery,” published by the Brookings Institution, we were asked to discuss the role that bankruptcy policy plays, or might play, in economic recovery.

After summarizing how bankruptcy posits a collective solution to a common pool problem of individual creditors and thereby improves the efficient use of assets, we consider two obstacles to its effectiveness.  The first is that bankruptcy proceedings often seem to begin too late.  The increased influence of debtors’ principal lenders probably counteracts this problem in part, but we suspect not fully.  We consider a wide range of strategies that lawmakers might use to encourage timely filing, some of which are fairly simple, while others are more speculative.

The second major issue is the relationship between bankruptcy and jobs.  The question whether bankruptcy should be used to protect jobs is a recurring theme that came to the fore most recently when the government used bankruptcy to bail out Chrysler, justifying its intervention as preserving jobs.  We caution that distorting the standard bankruptcy rules—focused on efficient use of assets—to save jobs in the short run may have more problematic effects overall.

The full-length article can be found here.

A Recent Decision in the Fisker Case Brings New Life to the Credit Bidding Debate

posted in: Claims Trading | 0

Author: Nelly Almeida, Weil Gotshal & Manges LLP

On January 10, 2014, the United States Bankruptcy Court for the District of Delaware in In re Fisker Automotive Holdings, Inc., et al., capped a secured lender’s right to credit bid its $168 million claim at $25 million (the amount it paid to purchase the claim). While the court noted that its decision was non-precedential, it may still have serious implications for the future of credit bidding.

Credit bidding has long been considered a fundamental protection afforded to secured creditors by section 363(k) of the Bankruptcy Code. Under section 363(k), at a sale of its assets, a secured creditor may “credit bid” the amount of its secured claim in lieu of cash unless the court “for cause” orders otherwise. The Fisker decision highlights the uncertainty surrounding what constitutes sufficient “cause” for a court to limit or abrogate a lender’s right to credit bid. In almost all cases where courts have found “cause,” the focus has been on whether there is a clearly defined existing dispute to a claim or lien. In Fisker, however, the court emphasized other “fairness” factors, such as the expedited nature of the proposed sale and the interest of promoting a fair auction, even though the opinion suggests that questions existed as to whether the potential credit bidder’s claims were secured. Thus, Fisker leaves us to wonder whether these “additional factors” would have been enough standing alone; indeed, what would have been enough?

A full length blog post discussing the decision and its implications can be found here.

EDITOR’S UPDATE: On February 20th, the US District for Delaware denied the secured creditor’s emergency motion for direct appeal to the Third Circuit.  Nelly Almeida’s description of the decision and the resulting auction can be found here.

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