Restructuring plans are a formal arrangement between a company and its creditors and/or stakeholders. In the complex landscape of corporate turnarounds, these plans play a pivotal role in reshaping the trajectory of struggling companies. However, success is underpinned by the availability and integrity of relevant financial data. This is true for the framework of Part 26A restructuring plans in the UK as well as international processes.
These transactions involve extensive negotiations with creditors, lenders, and other stakeholders to restructure debt obligations or secure additional financing. Without accurate insights into relevant financial projections, cash flow forecasts and debt-service capabilities, companies risk entering negotiations from a position of weakness, compromising their ability to secure consent or risk opposition in courts.
A critical aspect of financial restructuring transactions is aligning the proposed entity or group identified for the legal process with the business structures as they operate in reality. Decisions relating to the proposed plan entity are often made at higher entity levels (such as corporate, group, or legal entity levels). This is necessitated by the position of borrowing in a group structure, in accordance with the facility agreements, and/or the guarantors to the debt that requires restructuring. However, this could lead to situations where decisions are made about the subject entity and consequently the valuation scope, without sufficient consideration of the availability of detailed financial information to support the proposal.
Challenges arising from this are particularly relevant when it comes to provision of valuation evidence where financial information for a business is only accessible at the operating segment or business unit level, while the restructuring transaction is conceived at an entity level where such financial reporting information doesn’t exist. This complication could lead to challenges ranging from misaligned valuations, opposition from challenging parties on the basis or integrity of the data used and other implementation hurdles. For valuations in restructuring transactions to be robust and supportable in court, early engagement and meticulous planning are valuable in ensuring that the available financial information aligns with the proposed plans. Given the frequency and extent of legal challenges that can arise when a plan is opposed, the lack of relevant quality information for a meaningful valuation analysis may prevent sufficient evidence being presented to support the process.
Recent debates on high profile cases include whether the valuation should consider the value of the overall group for which the financial data is readily available or whether data should be obtained for the individual entity level of a group company and disregard group specific information for the DCF valuation. As alluded to, the key reason for this might be because the borrowing entity in the debt facility agreements and the security held by the lenders are different to the parent entity of the overall group, for which there is readily available robust financial data. These issues are also now being increasingly discussed in courts alongside the valuation issues.
This situation arises because very often transaction structuring is meticulously planned and decided in advance of the valuation instructions. Subsequently, during the valuation process, it becomes apparent that detailed financial information at the proposed plan entity level isn’t available, as the business doesn’t manage its operations on an entity-by-entity basis, but at a more general business unit operating level.
An additional complication can arise when businesses have complex, interwoven structures making it challenging to precisely map subsidiaries to fit into their respective operating units. In these situations, there may be limitations in available financial information, making it challenging to determine the valuation of the plan entity using conventional methods such as an income or market approach. Instead, the valuations may be required to be undertaken based on allocation exercises using profitability metrics. Such a methodology, although reasonable and defendable, can sometimes be open to challenge.
Timely and detailed financial data is crucial for robust valuations in restructuring transactions. Early expert valuation advice and meticulous preparation can help mitigate complications arising from the disconnect between restructuring plans and actual business structures.
Watch this video for five key takeaways we have learnt from some of the most significant and complex restructuring transactions, and how this may benefit you.
For more insight and guidance get in touch with Clare Gilbert or Susan Doss.
