Valuations in Uncertain Times
VRC’s financial reporting, portfolio valuation, financial opinion, tax reporting, and complex securities professionals are continuing to counsel clients and monitor the markets and economic environment to proactively discuss impacts and solutions with clients.
Questions About Valuation Impacts?
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Private Equity & Debt Capital Markets Adjust to the New Normal
As we head into Q4 2020, the new normal in private capital markets has fully set in, generally defined by prudence and caution, albeit a work in progress.
Private Credit Market Update
Private investors had much better information to work with for their second-quarter valuation processes than in Q1. Yet, it remains a struggle to determine how much weight to give COVID-influenced financial metrics from preceding months, how to handicap management forecasts for the second half of the year, and how to interpret volatile price data from public equity and credit markets.
BDCs Lean Heavily on VRC for Guidance on Navigating COVID Fallout
Business Development Company market participants are focused keenly on valuation in the wake of the novel coronavirus and the impact on their underlying portfolio investments.
New World Order Valuations
Developing valuations in a COVID-affected economy means taking new, altered views of a company along with making industry analysis de rigueur.
COVID Impact on Non-Control Equity Holdings
Companies carrying minority equity stakes at cost under ASC 321 are feeling pressure to estimate their fair values due to COVID-19. One company reviewed its holdings and found a significant delta between book value and fair value.
Impairment Barometer: Update Aug. 31, 2020
Observations and measures of how COVID-related events through August 31, 2020, have impacted equity market indices, adjustments to EBITDA expectations, and their influence on enterprise values by sector.
Q2 Economic Snapshots
Our latest data graphics covering the U.S. and 15 additional international economies paint a sobering picture of Q2 activities and measures.
COVID & Portfolio Securities Valuation
In Q2, market tone improved with more optimistic expectations as COVID-related restrictions began to ease, stimulative government efforts positively impacted the economy, additional data on the forecasted impact was collected, and many companies secured sufficient near-term liquidity.
Industry Index Discounted Spreads in Valuations
Considering the virus’ material impact on specific industries, we’ve seen a greater emphasis on secondary industry-specific loan indexes when controlling for credit risk.
Valuation Considerations Relating to Section 382 Limitations
Sweeping changes to the utilization of NOLs have occurred as a result of the Coronavirus Aid, Relief & Economic Security Act (CARES Act) in 2020.
Tracking the Socioeconomic Disruption of the Pandemic
With a core focus on impacts in the U.S., VRC has compiled a timeline to identify key events of the health and financial crises. Having this information at hand is important as clients work with us to prepare valuations to determine the information that was considered “known or knowable” as of a given valuation date.
Portfolio Securities Valuation: Understanding the Impacts on Credit Spread
Determining the price of risk is challenging. Based on VRC’s conversations with market participants, our own Adrian Lowery sheds light on activity in the middle-market direct lending space to help us understand how credit spreads have been impacted, and why.
Bulls vs. Bears vs. COVID-19: How do Control Premiums Change?
COVID-19 is impacting global markets and triggering a potential for interim goodwill impairment testing. In light of the current market downturn, can we anticipate the impact on control premiums? VRC analyzed control premium data vs. the DJIA over the 24-years from 1996 through 2019, to understand how sharp changes in the stock market impacted control premiums.
Adopting Fresh Start Reporting when Emerging from Bankruptcy
To the extent that companies can survive the crisis, restructure their debt, and ultimately emerge from bankruptcy, fresh start reporting will become a critical issue. Public and private entities that emerge from Chapter 11 bankruptcy may be subject to Accounting Standards Codification (ASC) 852.
A 50-Year Vintage: Rule 2a-5, Fair Value Obligations
A prudent recap and opinion on the proposed steps the SEC is taking toward modernizing fund valuation guidance.
SEC Proposed Rule 2a-5: There's No Time Like the Present
The SEC’s timing in announcing proposed Rule 2a-5 comes when an emphasis on valuation in the wake of market disruption by the novel coronavirus has never been more important. An in-depth review of virus-related market events coupled with an examination of their internal fair value policies, procedures, reporting, and recordkeeping related to those proposed under Rule 2a-5 may serve fund advisers and their boards well.
SEC Requires Third-Party Fairness Opinion Certificate for BDCs
The SEC, as a response COVID-19, provided temporary exemptions to BDCs to issue and sell senior securities if they are “unable to satisfy the asset coverage requirement under the Investment Company Act of 1940 (the Act) due to temporary mark-downs in the value of the loans to such portfolio companies.” This SEC order is in effect until 12/31/2020.
Anxious Times for Financial Statement Preparers Worried About Goodwill Impairment
The impact of the proliferation of coronavirus cases on financial markets is creating challenges for companies attempting to wrap up quarterly reporting. On top of concerns about the outlook for the economy and implementation of the CARES Act, companies with goodwill on the books are questioning whether they need to test for impairment and, if so, what parameters to adjust in a rapidly changing environment. VRC Co-CEO PJ Patel briefed financial reporting and SEC professionals on how companies are dealing with impairment questions in Q1 and planning for Q2.
The Impact of COVID-19 on Private Equity
Despite the unprecedented nature of the current economic crisis, lessons from past market disruptions can be helpful. The most frequently cited point of comparison—perhaps simply because of its proximity in time—is to the global financial crisis of 2008. That’s understandable—it’s only natural to look back at the most recent market dislocation for takeaways about the current one. But as we consult with clients in the private equity space about the impact of the pandemic on their business and portfolio company valuations, we’re finding it every bit as useful to reflect on another period of market extremes, the heady days of the dot-com economy.
Impact on Midstream Energy Companies Will Take Time
As midstream companies consider the impact of the pandemic, their concerns range from immediate questions of intangible asset impairment to longer-term questions about structural impacts on the market.
COVID-19: Measuring Triggering Event Impacts and Subsequent Impairment Testing
Some of the most significant financial consequences of the novel coronavirus will be seen in both current and coming company disclosures. Accurately identifying the potential triggering events for the impairment of goodwill and other assets, in light of COVID-19, is a necessary approach that companies should take now with their trusted partners.
COVID-19: Spotlight on Goodwill Impairment Testing
Is the novel Coronavirus a triggering event and should it be addressed for Q1 or Q2 2020?
Valuation Essential to Restructurings, Bankruptcies
Many businesses hit hard by COVID-19 shutdowns may need to restructure through an out-of-court workout, Chapter 11 reorganization, or Chapter 7 liquidation. In all cases, an objective valuation is a critical component.
An Orderly Repricing of Risk in Private Debt
The impact of the coronavirus on financial markets has been breathtaking. Investor fear in the capital markets quickly went “viral,” which led to a rush for liquidity and retail fund-led widespread selling. This selling spree occurred first in the public equity markets and then the bond and loan markets. The last time we saw downside volatility of this magnitude in the public markets was the 2008/2009 Great Recession.
Fairness & Solvency Opinions: Transaction Transparency
In up and down markets, businesses of all sizes, types, and industries must grow to survive and thrive. Pursuing strategic growth will likely entail a business combination, leveraged buyout, divestiture, among other means. This also requires a qualified, third-party valuation firm to help boards of directors support its deal-making decisions, mitigate risk, withstand scrutiny, and improve shareholder transparency.
Typical transactions triggering the need for a fairness opinion include:
- Synergistic mergers or acquisitions; Divestitures
- Tender offers including leveraged buyout (LBO), management buyout (MBO), or other going-private transactions
- Large block stock purchases; Private placements; Down-round financings
- Related party transactions; Transactions with competing offers; Transactions restricted by a bond indenture
- Dividend recapitalizations; Reorganizations; Hostile takeovers
Company boards may seek to obtain an outside solvency opinion for:
- Leveraged buyout (LBO) deals where leverage is significant
- Public company share repurchase programs
- Dividend recapitalization transactions
- Reasonably equivalent value or capital surplus testing
- Corporate spin-off
A solvency opinion rendered at the time of a transaction is one of the most cost-effective ways to mitigate the risks.
Continued Updates and Coverage
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