12.5 Chapter 5: Valuation in the context of restructuring

Restructuring is inextricably linked with valuation. In a liquidation, the valuation of the business, i.e. the determination who is entitled to value and who is not, takes place through the market. In a restructuring the value of the business is distributed directly to the creditors in kind, without exposing the business to the market. The valuation therefore has to take place through a “paper” valuation exercise.

In a restructuring, a valuation may be needed for a variety of purposes. First, a valuation is needed in order to determine the total value that is available for distribution (in kind). To establish this, the subject of the valuation is not, or at least not only, the business as a whole. The value of the business is distributed in the form of various financial instruments. It is these individual financial instruments that need to be valued in order to establish whether the creditors receive the value to which they are entitled. Of course, the value of the instruments that are issued is a function of the value of the business itself. The sum of the value of the individual financial instruments that are to be issued to the various claimants is not, however, necessarily equal to the value of the business as a whole. Because of the decreased marketability of the individual instruments and because the individual instruments, taken separately, do not give control over the business, the sum of the value of all individual financial instruments will often be lower than the value of the business as a whole. This can negatively impact value and can be a disadvantage of a restructuring. This particular disadvantage does not arise with a liquidation. The business is then sold as an undivided whole, including control over the business. The market for a business as a whole is usually more liquid than that for financial instruments in a private company, which, individually, provide no control.

A second purpose of valuation can be to establish the amount that has to be offered under the plan in the form of cash if the classes that can expect to receive a distribution in cash in a liquidation do not consent (by the required majority within each relevant class) to a different form of payment under the plan. One must then determine what proceeds could reasonably be expected in a liquidation. This liquidation analysis is mostly also required, as a practical matter, to demonstrate to the creditors that they are better off with the proposed plan than without and to persuade them to vote in favour.

A third purpose of valuation in the context of a restructuring is to ascertain the amount of a secured or privileged claim, where this amount is linked to the value of the underlying collateral or property.

A fourth, related, purpose is to establish, for the classification of secured creditors, which part of their claim can be characterised as secured and thus be included in the class of secured creditors, and which part is to be characterised as unsecured and should thus be included in the class of unsecured creditors.

In Chapter 5, I provide a brief overview of the various steps that are involved in a valuation exercise, and discuss specific aspects of these steps that are relevant to a restructuring. In this context I look at such topics as the purpose and the object of the valuation (on which see above), the valuation date, the premise of the valuation, the appropriate valuation standard, the valuation method and the application of discounts for lack of liquidity and control. The end of this chapter contains a brief explanation of the terminology around valuation that is frequently used in this book.