Valuation Flashcards
What are some of the barriers to a successful valuation?
Extend and pretend strategy; inexpert judges; self-interested experts (Hartford RR); time uncertainty (Atlas Pipeline); Distrust of the market (stigma; info asymmetry); same info can be interpreted as a positive or negative (SEC in Atlas)
When is a valuation ordered?
If a firm objects to the plan and the judge is preparing for a cramdown
What makes the precision of a valuation more important
More tiers of interest
How does each party have an incentive to destroy value out of self interest?
Shareholders (+out of the $ creditors) have an incentive to increase the risk of the firm because they have nothing to lose
Creditors may want to force a liquidation to get paid faster even if there is going concern value to be had; might also be overly risk averse
How does valuation decide if the case should be converted to chapter 7?
If going concern value < liquidation value, convert to ch 7
Why should even deep in the money creditors care about valuation?
It decides how many different ways the pie is split. As a result, the deep in the $ creditors want a low valuation so they can have close to the whole value of the firm (all of the shares)
Misses in valuation can create windfalls for parties (Atlas Pipeline)
What is the capitalization multiplier?
The inverse of the discount rate. Drastically effects the value of the firm. PV of perpituity=periodic cashflow/discount rate
What are the two ways to eliminate risk premium demanded by investors in a company?
Merge the company with another company that has an inverse risk structure; diversified shareholder portfolio
What does a rational out of the $ claimant do with respect to valuation?
Extend and pretend. Increase the riskiness of the company (Hunt Brothers). Leverage the option value in settlement negotiations (Saxon)
What two factors increase the ability of shareholders to extract oversized settlements?
1) The riskiness (or ability to increase riskiness) of the company without getting replaced with a trustee under 1104. Ability to diversify this risk has no bearing. The threat of making these changes alone can extract concessions.
2) Ability to delay the bankruptcy (ethical concerns?)
What are some of the in-the-money creditor’s tools to fight back against asset substituting management?
1) object at 363(b)1 hearing for use/sale/lease of assets outside of the ordinary COB
2) Attach strings (mandatory 363 sale if milestones aren’t met) to the DIP financing
When is the liquidation v reorganization decision made?
Can be made by management pre-bankruptcy (self liquidation)
Judge explicitly grants a motion to convert to ch7
Implicitly (deny a DIP financing motion, deny a motion to use cash collateral, deny motion to use assets, say that certain creditors aren’t adequately protected and not necessary for restructuring and lift the stay for them)
