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In real estate bankruptcy proceedings, the determination of a post-bankruptcy interest rate is often a critical element of the repayment or restructuring plan. The appropriate rate is typically not one that can be observed or obtained in the regular markets — the debtor in possession is already in bankruptcy and consequently, a commercial loan is very likely unfeasible. The U.S. Supreme Court provides guidance to addressing this issue in Till v. SCS Credit Corp., which states that:
A major part of the anatomy of a turnaround is the weekly cash flow. A deceptively simple exercise, it presents a powerful tool for supporting complex management decisions. Applied during a restructuring process in a myriad of circumstances, it can serve as a basis for valuation from free cash flow or the foundation of a plan of liquidation. The usefulness of a weekly cash-flow analysis is agnostic to the subject business or industry.
The Association of Insolvency and Restructuring Advisors (AIRA) released its new “Standards for Distressed Business Valuation,” which went into effect on March 1, 2014,[1] and will provide the best practices for valuation professionals.
Editor’s Note: This article provides a general overview of the current state of financial institutions’ resolution planning as required by the Dodd-Frank Act and is the first in a series of related articles.
With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2010, there is no denying that life as it was known at the time for large financial institutions was inexorably changed.
In today’s market place, many private-equity firms are focused on investing in “complex situations.” Complex can be interpreted as including high-growth companies with well-performing management teams in need of growth capital where the buyer will perform carefully-executed due diligence. Complex also applies to investments in overlooked, undermanaged and underperforming companies, which might include distressed businesses. Fewer private-equity investors compete for deals in this niche.
Many have reviewed the U.S. Supreme Court’s Till Opinion (Till v. SCS Credit Corp.) and walked away shaking their heads in confusion. The underlying case involved a higher-risk borrower who had purchased a used truck and shortly thereafter filed for bankruptcy under chapter 13. The parties asked the Court to choose the best method to determine a cramdown interest rate. It is important to realize that the Court was not addressing an all-inclusive list of methodologies available to financial practitioners, but was choosing from four methodologies previously used by various bankruptcy courts.
I am not an investment banker, so I’ve never had the benefit of really knowing what goes on in the head of one when deciding whether to take a particularly risky sell-side 363 sale engagement. But I have been through a few of these situations as an observer (or an attorney for one party or another), and, over time, I’ve seen something of a theme emerge: investment bankers underestimating—or completely overlooking—the risk of forfeiting a success fee if the assets simply do not yield enough money at auction to satisfy the senior secured debt.
One of the most significant challenges in managing a company through a restructuring, whether in or outside of chapter 11, is ensuring that critical vendors continue to provide goods and services to the company. Attempts to maintain strong vendor relationships are often undertaken in the face of vendors’ fears of their own financial losses in the event of a bankruptcy filing and concerns of “throwing good money after bad.”
Many turnaround experts believe that the key to fixing a distressed manufacturing company requires quickly turning assets, including idle factories or other underutilized facilities, into cash while simultaneously reducing expenses. However, selling a factory may not always be the best way to obtain value or minimize the costs associated with that asset.
Section 505 of the Bankruptcy Code allows trustees of debtor companies the opportunity to have a bankruptcy court potentially determine the amount of all tax liabilities during the course of a bankruptcy case. Section 505(b) also enables trustees to accelerate the resolution of tax issues, bring certainty in the amount of tax the estate may owe and close the of statute of limitations years ahead of schedule. Perhaps the most important advantage of using this provision is that it could eliminate any lingering trustee, officer and director liability in an expedited fashion.
