CIGA Restructuring Plan - A Valuer's Perspective FRP

CIGA Restructuring Plan: A valuer’s perspective 10 plans in



The importance of the relevant alternative valuation to the sanctioning of a Plan necessitates a deeply considered and robustly supported valuation process. Value is often professed to be what a ‘highest bidder is willing to pay’ and whilst this is not an unreasonable description, determining that amount is is rarely a straight-forward exercise. A market testing exercise – where an indication of value is sought through an auction or sale process – is often not feasible for a company looking to enact a Restructuring Plan, not least due to the myriad of complicating factors and likely time constraints, but also as potential bidders may not conduct the necessary enquiries or due diligence required to put forward a reliable offer if they are aware of or suspect a shadow-testing exercise. As such, the valuation supporting a Restructuring Plan will typically take the form of an independent estimate of value based on ‘desk-top’ analysis prepared by a firm of valuation experts. The Virgin Active judgement demonstrated an acceptance that a ‘desk-top’ valuation exercise is appropriate with the Judge stating that there was “no absolute obligation” to undertake a market testing process and finding “no basis upon which to impugn” the desk-top valuation that was put forward, despite challenges from certain creditor groups. Notwithstanding this, it should not be lost that a desk- top exercise is an attempt to estimate the outcome that would be achieved (i.e. the value that would be recovered) if a genuine market testing exercise were able to be undertaken within the prescribed set of parameters – as defined by both the relevant alternative itself, and the state of the market at the relevant time. Thorough examination of the valuation should be expected. The valuation supporting the Smile Telecoms Plan was “interrogated at length by the senior lenders and their advisers”, whilst Premier Oil’s submission came under “considerable scrutiny”. Add to this that the Hurricane Energy Plan was rejected, and that further valuation analysis was requested by the court in respect of the Houst valuation (following opposition from HMRC), and it is clear that depth of analysis is essential and a range of approaches should be considered.

The relevant alternative is what the court considers to be “most likely” and this should not be pre-judged at the outset. The variety of alternatives accepted in the cases so far (and the one rejected) demonstrates that establishing the appropriate relevant alternative requires thorough debate and consideration in respect of what is most likely to occur in the absence of a Plan. It may be the case that the closer the company is to immediate cash-flow insolvency, the more likely it is that the relevant alternative is liquidation or administration, but any exercise should consider the full breath of possibilities and both the conclusion and thought process should be robustly supported. It is evident that the court values the input of a company’s directors, with the Judge (ED&F Man) stating “the court should recognise that the directors are normally in the best position to identify what will happen if a scheme or restructuring plan fails” and Judge Wolffe (Premier Oil) placing considerable weight on the fact that [the directors] had first-hand experience of the challenges in developing and negotiating a previous transaction and attempted restructuring arrangement. Whilst establishing the relevant alternative is part of the wider valuation exercise, it requires input and insight from outside the valuation spectrum including discussion and debate involving the company’s directors, legal, and financial advisers, as well as recognition of the paths trodden under both Schemes and CVAs. It may be necessary to approach the selection of the relevant alternative as an iterative process, as the most likely alternative scenario may be in part determined by which of a range of possibilities is estimated to be value maximising (which would itself be informed by the valuation analysis). Failing to explore a range of possible alternatives may leave a process exposed to challenge, criticism and dispute.

The importance of the relevant alternative valuation to the sanctioning of a Plan necessitates a deeply considered and robustly supported valuation process. Jim Davies Corporate Finance



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