Restructuring Plans: Examining the evolution of the valuation debate
Wednesday July 19, 2023
In our latest article, Financial Advisory Partner, Jim Davies, explores the valuation element of Restructuring Plans.
Three years in, how is the RP valuation debate evolving?
Since the inception of Restructuring Plans (RPs), it has been evident that valuation would play a crucial role. The Relevant Alternative, defined as: whatever the court considers would be most likely to occur in relation to the company if the compromise of arrangement were not sanctioned, should naturally require a compelling body of valuation evidence to support the notion that no party is worse off under the Plan, vis-à-vis the counterfactual.
The uncertainty around what is indeed most likely to occur in the absence of a proposed Plan, and what recovery of value that would result in, puts valuation front and centre of the judgement process.
Each proposed Plan has unique characteristics and adds new content to a growing body of case law, but as we pass the third anniversary of the Plan’s inception, what themes have recently developed and how has the valuation aspect evolved?
Taking the last six months as a snapshot
Six RP proposals have been heard by the court. Four have been sanctioned and two rejected. Of the four sanctioned cases, one had an extensive valuation dispute (warranting around 50 pages of commentary in the judgement), whilst for the other three the valuation analysis was accepted, without formal challenge, by both the opposing creditor classes and the judge.
How has the valuation evidence put forward in recent cases helped or hindered a smooth process?
Exploring the alternative
Identification of the relevant alternative is in itself a function of valuation, as the most likely alternative scenario may well be determined by which of a range of possibilities would be value maximising. Failing to fully explore various possible outcomes – from both a plausibility and a value perspective – can leave a process exposed to challenge and criticism.
In deciding not to sanction one recent case, the judgement noted that on “a balance of probabilities” the court could not be satisfied that the relevant alternative put forward was the most likely alternative outcome. As no other scenarios had been explored or valued, the court did not have a basis of evidence upon which to sanction the plan.
Conversely, in a recently sanctioned case the judgement noted that the evidence had “considered five possible scenarios likely to occur if the Plan was not to be implemented and two possible scenarios in an administration”, with the judge being “firmly of the view that the Plan should be sanctioned.”
The challenge of subjectivity
Whilst a degree of subjectivity is often inevitable in valuation, supporting key value-driving assumptions with meaningful evidence is a central discipline and key in providing a well-supported position.
Of the recent RP’s that have been rejected or seen valuation evidence heavily challenged, a key issue noted in the judgments, has been around the reliance on high-level assumptions. In respect of valuation evidence, recent judgements have referenced “professional judgment with very little to go on”; noted that “slight variations [in high-level assumptions] could lead to brutal differences”; and identified “insufficient allowance for what appear to be obvious sensitivities [meaning it is] legitimate to question its overall robustness.”
Utilising compelling research and bench-marking to support subjective assumptions, and conducting informative sensitivity analysis, is vital to providing a supportable opinion of value and strengthening the company’s proposal.
Navigating a fast-track process
With such a brief window for the hearing of evidence and cross-examination of experts, it is crucial that the documentary valuation evidence provides enough detail and explanation to be compelling on a standalone basis.
A recent judgment highlighted the “tight timeline” as a difficulty for the court, as valuation evidence that was considered in a short timeframe “could easily have taken three days of expert evidence”. The judgement noted another issue being that one valuation expert was not called to give evidence, hampering the court’s ability to compare his evidence with that of the opposing expert.
The valuation of privately held companies is complex and subjective – particularly so when a company is facing operational or financial distress. With the burden of evidence firmly on the company proposing the plan, it is essential that the valuation evidence is clear, robust and supportable without needing to rely on extensive verbal evidence.
FRP conducted the relevant alternative valuation analysis for three recently sanctioned plans in which the valuation evidence has been accepted without challenge. By recognising the importance of: exploring a variety of potential alternatives; providing both in-depth and detailed analysis; and submitting robust, self-explanatory reports – our work has helped the plans to be sanctioned and the companies involved to rebase and advance from a position of strength.
Where next for the RP?
The RP is becoming a go-to toolkit in UK corporate restructuring and remains a fascinating arena as application and case law evolve. Broader developments from recent cases include:
- Judges using the benefit of Discretion to reject plans even if conditions A (no party worse off) and B (agreed by a party with economic interest) have been met
- HMRC emerging as uniquely positioned creditor class, with the concept of Fairness providing a potential defensive mechanism
- Application in the mid-market, with mixed results
The valuation function will remain integral to the success of RPs going forward, building upon experience from the journey so far and adapting as required to address emerging themes.
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