skills/distressed-recovery-waterfall/references/valuation-liquidation.md

# Valuation and Liquidation Framework

## Table Of Contents

- Principle
- Reorganization value
- Enterprise value to distributable value bridge
- Sale value
- Liquidation value
- Liquidation cases
- New-money and dilution
- Sensitivities
- Trading-price reconciliation

## Principle

Recovery is driven by distributable value, not headline enterprise value. Build a bridge from value to proceeds available to each class.

## Reorganization value

Use several methods where possible:

- Trading comps.
- Precedent transactions.
- DCF.
- Sum of the parts.
- Plan value.
- Market-implied value from debt trading.
- Back-solve from plan recoveries.
- Exit-financing capacity.
- Sponsor re-underwriting value.

Pressure-test:

- Normalized EBITDA.
- Customer attrition.
- Margin recovery.
- Cost saves.
- Capex underinvestment.
- Working-capital needs.
- Cash taxes.
- Cyclicality.
- Commodity exposure.
- Exit multiple.
- Management credibility.
- Exit financing availability.

## Enterprise value to distributable value bridge

Default bridge:

1. Reorganization enterprise value.
2. Plus unrestricted cash available for distribution.
3. Less minimum cash or required liquidity.
4. Less DIP or superpriority claims.
5. Less administrative and priority claims.
6. Less professional fees.
7. Less transaction costs.
8. Less debt-like obligations not captured in funded debt.
9. Less exit financing fees, OID, or required paydowns.
10. Equals distributable plan value.

Adjust for plan-specific treatment.

## Sale value

Analyze:

- Whole-company sale.
- Division sale.
- Asset-by-asset sale.
- 363 sale.
- Credit bid.
- Stalking horse bid.
- Assumed liabilities.
- Excluded liabilities.
- Auction dynamics.
- Bid protections.
- Regulatory approvals.
- Customer or contract assignment issues.
- Wind-down estate.

Sale proceeds should be allocated by collateral pool when required.

## Liquidation value

Use asset-specific recoveries. Do not apply a generic haircut unless no data exists.

### Asset lines

- Cash and cash equivalents.
- Restricted cash.
- Accounts receivable.
- Inventory: raw materials, WIP, finished goods.
- Prepaids.
- PP&E.
- Real estate.
- Fleet, aircraft, vessels, equipment.
- IP and brand.
- Customer contracts.
- Licenses and permits.
- Equity interests in subsidiaries.
- Tax refunds.
- NOLs and tax attributes.
- Litigation or avoidance actions.
- Insurance proceeds.

### Deductions

- Sale costs.
- Wind-down costs.
- Severance.
- Professional fees.
- Lease rejection damages.
- Environmental remediation.
- Taxes.
- Customer refunds.
- Warranty claims.
- Contract rejection or cure costs.
- Time discount.
- Operating losses during sale.

## Liquidation cases

Provide at least:

- Orderly liquidation value: controlled monetization over time.
- Forced liquidation value: urgent sale with greater discounts and higher disruption.

If liquidation is only a valuation floor, say so.

## New-money and dilution

Adjust recoveries for:

- DIP roll-up.
- Exit facility.
- Rights offering.
- Backstop premium.
- New-money discount.
- Warrants.
- MIP.
- Commitment fees.
- OID.
- Exit fees.
- Governance incentives.

Show recoveries before and after dilution.

## Sensitivities

Run sensitivities on:

- EBITDA.
- Valuation multiple.
- Cash balance.
- DIP size.
- Admin and professional fees.
- Disputed claims.
- Make-whole and default interest.
- Liquidation recoveries.
- Exit financing capacity.
- Rights offering size.
- MIP percentage.
- Backstop fee.

Useful outputs:

- Recovery heatmap by EBITDA and multiple.
- Value-break sensitivity.
- Fulcrum-shift table.
- Trading-price implied value.
- Liquidation floor versus plan value.

## Trading-price reconciliation

Compare model recovery to market price. Explain differences:

- Market expects lower value.
- Illiquidity or forced selling.
- Control premium or accumulation.
- Litigation option value.
- New-money participation value.
- Time value and uncertainty.
- Covenant or LME risk.
- Different claim assumptions.
- Different view of exit multiple or EBITDA.

Do not state that the market is wrong without evidence.