International and Cross- Border Insolvency & Restructuring: Restructuring Europe s impaired enterprises dealing with the valuation issue

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1 International and Cross- Border Insolvency & Restructuring: Restructuring Europe s impaired enterprises dealing with the valuation issue R. Craig Martin, Partner Wilmington, Delaware

2 When is valuation an issue in US Insolvency Cases? Automatic Stay: The Automatic Stay can be lifted to allow creditor to exercise remedies if the debtor does not have equity in such property and the property is not necessary to an effective reorganization. Secured Claim: An allowed claim of a creditor secured by a lien on property in which the estate has an interest... is a secured claim to the extent of the value of such creditor s interest in the estate s interest in such property.

3 When is valuation an issue in US Insolvency Cases? Secured Creditor Claim Bifurcation: To the extent that an allowed secured claim is secured by property the value of which... is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest... fees, costs, or charges.... Such claim is an unsecured claim to the extent that the value of such creditor s interest... is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor s interest.

4 When is valuation an issue in US Insolvency Cases? Use of Cash Collateral or Priming DIP Loan: Adequate protection generally protects from a decrease in the value of such entity s interest in such property Sale, Use, or Lease of Property: When a Debtor sells assets the value of the assets and the price paid for them may be evaluated by the Court.

5 When is valuation an issue in US Insolvency Cases? Plan Confirmation Tax and other priority claims must be paid in cash equal in value to the allowed amount of the claim Non-consensual or Cramdown plans must be fair and equitable which is described as follows: Secured Lender must receive consideration equal to the value of claim Unsecured Creditor must either receive value equal to the full amount of claim or no junior classes can receive any property.

6 When is valuation an issue in US Insolvency Cases? Other Instances where Value Might Be Litigated. Did the Debtor file its case in Bad Faith? Entitlement to interest payments for the period after the bankruptcy case is filed? Avoidance Actions (preferences and fraudulent transfers) Rights Offerings in Plans of Reorganization Appointment of an Equity Committee

7 Valuation Approaches Asset Method (adjusted book value, replacement costs, etc.) Income Approach (capitalized cash flow, discounted cash flow) Market Approach (comparable company, comparable transaction) Market Price and Solvency Does the Market know best? Others? (Black-Scholes, Monte Carlo, etc.)

8 Proving Value Adversarial Process Competing Expert Testimony (Live? Via video? Reports offered and only cross-examination?) Purchase price paid for debt or investor view may be irrelevant Standard for Admissibility of Testimony: Does the valuation method have a reliable basis in the relevant discipline?

9 Is Valuation Reasonable? Is the expert qualified through education or training and experience? Has the method been tested? Is the method subject to discussion in the discipline s literature? Is that literature peer reviewed? Is the valuation method widely accepted in relevant industry? What is the method s error rate? Are there industry standards for use of method?

10 Other Expert Challenges Bias Relevance Failure to consider reliable data Flawed assumptions Relying on unverified data Non-judicial uses of the method at issue Has any court ever approved the method used

11 Materials Available This PowerPoint and a Detailed Bibliography are available