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ganized debtor). Accordingly, it may be more useful for claimants and holders of interests to know the
               value of the debtor’s assets before negotiating their respective stake in the reorganized debtor.


               The valuation approaches that are best suited to an assessment of a debtor’s reorganization value are the
               discounted cash flow method (an income approach) and the guideline public company and M&A trans-
               action methods (both market approaches). The inherent appeal of the discounted cash flow method,
               when calculating a debtor’s reorganization value, is that it can be tailored so that the unique attributes of
               the debtor and circumstances of the reorganization can be factored into the valuation. On the other hand,
               although the market approach may not lend itself to tailoring the value estimate to the unique attributes
               of the debtor and the circumstances surrounding the reorganization, the market approach is grounded in
               arm’s-length, market-driven transactions. Accordingly, both the income and market approaches will
               likely provide useful insight from which some meaningful inference can be drawn regarding the poten-
               tial market value of the reorganized debtor.

               As a first step in assessing a debtor’s reorganization value, it is essential that the analyst make a proper
               assessment of the viability of the turnaround thesis. Some of the most important considerations in as-
               sessing the viability of the turnaround thesis include the following:

                   1.  A thorough evaluation of relevant economic and market conditions, the competitive landscape of
                       the debtor’s industry, the regulatory environment, and the origins of the debtor’s operational
                       challenges


                   2.  An assessment of whether or not the debtor has sufficient management team depth and breadth to
                       execute the proposed turnaround


                   3.  Consideration of whether or not the nature of the debtor’s operations and the makeup of its assets
                       lend themselves to reorganization. For example, debtors with significant tangible assets that are
                       more easily redeployed (such as airplanes or hotels) lend themselves to reorganization better than
                       companies that possess significant intangible asset value.

                   4.  Consideration of an appropriate and sustainable capital structure

                   5.  Thorough evaluation of cash flow projections to determine that they are reasonable and con-
                       sistent with the turnaround thesis

                   6.  Determination of whether or not the debtor has adequate liquidity to effectuate the reorganization

        Costs of Financial Distress


               It may also be helpful for the analyst to consider costs of financial distress as a framework when as-
               sessing the reorganization value of a debtor. Costs of financial distress tend to be lowest for entities with
               a significant amount of tangible asset value and highest for entities that possess little tangible asset val-
               ue. Other factors that may influence the relative impact of costs of financial distress are the nature of the
               distress (financial versus operational), the sensitivity of the company to business cycles, and company
               size. Such factors are important considerations when developing cash flow estimates and assessing the
               reorganization value of a debtor. The costs of financial distress are divided into two broad categories: di-
               rect costs and indirect costs. The direct costs of financial distress are primarily the fees paid by the debt-
               or to accountants, attorneys, consultants, and other professionals relating to the administration of the
               bankruptcy estate. The direct costs of financial distress are relatively easy to measure.




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