Inactive markets, short time scales, cash-flow constraints, and potential damage due to public knowledge of financial distress may all have increased impact on ‘going concern’ valuations.
COVID-19 has had an impact, of course. It’s decreased the financial strength of many classes of dissenting creditors, making them more fearful of secondary alternatives such as liquidation. The other reason is the UK’s new Corporate Insolvency and Governance Act 2020 (CIGA), which introduces restructuring plans and new ‘genuine economic interest’ factors to the process.
A fantastic summary of the new issues was released last week. It’s the work of PwC UK partners Kellie Gread and Mike Jervis, and Director Adam Sutton. In ‘Act Now to Recover: Valuations—The New Old Battleground in Restructuring,’ the authors agree that everyone involved in any insolvency proceeding will be looking directly at the cash runway and whether ‘there is a sufficient cash runway to give the company time to engage in a market testing process’ rather than taking steps that could be ‘value destructive.’
There’s always a strong desire for creditors—and dissenting creditors—to argue for the highest yielding alternatives. This PwC analysis argues that valuers and their senior lender clients who argue for liquidation value will ‘need to be supported with more objective evidence of asset discounts, backed by commercial judgement and experience rather than rough rules of thumb.’
Discounted cash-flow valuations used to support the new restructuring plans under CIGA will be challenged, as will the business plans that support them. As the authors conclude, ‘if the ability of a company to survive after restructuring is in serious doubt, the Restructuring Plan may be called into question, allowing creditors to push a company toward liquidation.’ PwC projects that valuers will need increased industry expertise, a convincing set of multiple scenarios, and a wider range of sensitivity analyses to withstand these pressures.
They also make some wise observations:
- Valuers will not be able to ‘park’ increased uncertainty—this must be reflected in the cash flows and terminal value conclusions;
- Macroeconomic conditions will be even more important in valuing an RP; and
- Market multiples and transaction values can still provide ‘important alternative valuation methods.’
Our thanks to Marianne Tissier for highlighting this helpful PwC analysis for BVWire—UK.