Page 104 - Bankruptcy Volume 1

Equity restructure

Equity to senior debt
(percent of new equity) 100.0% $— $250,000 $1,000,000
Equity subordinated debt
(percent of new equity) 0.0% — — —

250,000 1,000,000
Total debt + equity after restructure $2,340,000 $2,590,000 $3,340,000

Assumed reorganization value of XYZ $2,340,000 $2,590,000 $3,340,000
Company, Inc.
Recovery percentages after restruc-
ture:
Senior secured debtholders (new debt +
equity/old debt) 60.0% 70.0% 100.0%
Subordinated debtholders (new debt +
equity/old debt) 70.0% 70.0% 70.0%
Trade creditors (new debt/old debt) 70.0% 70.0% 70.0%

Liquidation Analysis

The Bankruptcy Code requires that each holder of a claim or interest who does not vote in favor of the
plan must receive at least an amount equal to that which would be received in a Chapter 7 liquidation.
This financial protection for dissenting members of an accepting class is known as the best interests test.
To satisfy this test, the accountant prepares a liquidation analysis of the debtor. A typical liquidation
analysis includes a listing of all assets with two corresponding values: (1) a going-concern value associ-
ated with the reorganized entity and (2) a value assuming the assets are liquidated in an orderly fashion
in a hypothetical Chapter 7 case. For example, the liquidation value of a retail chain would use values
expected from sales of stores or groups of stores if it is anticipated that such stores could be sold in a
reasonable time period rather than using going-out-of-business values. In determining the liquidation
value of an enterprise, the accountant should consider the expenses associated with liquidating the assets
and prepare detailed notes to accompany the liquidation analysis. The accountant preparing a liquidation
analysis should not attempt to value assets outside of his or her area of expertise. For example, an ac-
countant capable of determining the liquidation value of a cement manufacturer’s raw materials may not
have the expertise to value its art collection. When confronted with such special assets, the accountant
should seek out an expert opinion. For more analysis, see exhibit 2, "Liquidation Analysis."

In addition to satisfying the best interests test, debtors use liquidation analyses to negotiate with credi-
tors both before and after filing a petition. For example, XYZ may use its liquidation analysis to

 educate its trade creditors as to their inferior position with respect to the senior creditors and

 convince them that their best chance for recovery is through a reorganization (as opposed to a
liquidation, in which all proceeds would go to the creditors with higher priority).

Although companies in financial distress often try to use resources in their finance and accounting de-
partments to prepare such schedules and analyses as a means to reduce costs, they frequently lack the
expertise required and need to hire outside professionals to assist them in preparing the liquidation anal-
ysis and other financial schedules. The Bankruptcy Code provides a safe harbor provision for account-
ants and others who prepare information for inclusion in a disclosure statement from the often inade-

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