Restructuring Plans heating up: A valuer’s perspective on current developments
Friday January 26, 2024
Financial Advisory Partner, Jim Davies, explores the recent developments in Restructuring Plans
Financial Advisory Partner, Jim Davies, led the relevant alternative valuation analysis for four Restructuring Plans that were sanctioned by the High Court in 2023. Here, he explores recent developments in light of the Adler Restructuring Plan being overturned.
With Adler now overturned and McDermott on the horizon, how is the 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 at the 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 two seminal cases in early 2024 may reshape the landscape more than others.
January 2024: Adler
- The first RP to be overturned by the Court of Appeal
- Judgement provides guidance on a number of legal and procedural areas
- Views on discretion, fairness, disclosure and timing all point to a levelling of the playing field on valuation
February 2024: McDermott
- Set for a 6-day sanction hearing after an extended timeline
- Seeking to compromise a $1 billion arbitration award
- Complex valuation aspects in relation to letters of credit and contingent liabilities
From a valuer’s perspective, what are we learning from these and other recent cases?
Rejection by discretion
Adler was overturned as “the Plan departed in a material respect and without justification, from the scheme of pari passu distribution”. Whilst this in itself is not a valuation matter, the fact that the case was (i) appealed, and (ii) overturned brings into sharp focus the fact that judges will in some cases use discretion to reject plans even if conditions A (no party worse off) and B (agreed by a party with economic interest) have been met. In many cases, the central battleground will be valuation and in applying their discretion, judges will consider two central questions:
1. Is the valuation of the relevant alternative
compelling and evidence based?
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”.
With the burden of evidence firmly on the company proposing the plan, it is essential that the valuation evidence is clear, robust and supportable. Utilising appropriate research and benchmarking to support subjective assumptions, and conducting informative sensitivity analysis, is vital to providing a supportable opinion of value and strengthening the company’s proposal.
2. Has the right counterfactual been valued?
Identification of the relevant alternative is 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.
Conversely, in a recently sanctioned case the judgment 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”.
Expect a challenge
Both the Adler and McDermott processes raise important questions about how much time should be given to stakeholders to consider proposals before having to vote on them, and how much energy a court should devote to considering valuation and related evidence.
The movement towards greater disclosure puts compromised creditors in a stronger position to mount a challenge, and the potential for an extended timeline provides another vital string to the bow of their advisors.
Compromised creditors will now feel more capable of raising a challenge, whilst company-side valuation experts must work on the basis that rival valuation evidence may well be submitted, and cross-examination will be required.
The concept of fairness
Recent cases have seen HMRC emerge as a uniquely positioned creditor class, with the concept of ‘fairness’ providing a potential defensive mechanism. The Adler appeal judgement also highlighted the importance of fairness in distribution of the restructuring surplus. The ways in which the notion of fairness shapes the
framework of the RP will gradually gain clarity as case law evolves. For now, it remains a key area of potential challenge alongside, and intrinsically linked to, valuation.
As case law continues to evolve, drawing on the relevant aspects of recent judgements and respecting the relationship between valuation and the wider process are increasingly central disciplines in the planning and implementation successful RPs.
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Identification of the relevant alternative is 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.Jim Davies Financial Advisory