Valuations in Uncertain Times
The Coronavirus (COVID-19) pandemic is causing economic turmoil, but during this time our financial reporting, portfolio valuation, financial opinion, tax reporting, and complex securities professionals are counseling clients through this period of uncertainty.
Our professionals are continuously monitoring the rapidly changing environment and proactively discussing impacts and solutions with clients. We are continuing to support your financial and tax reporting requirements and deadlines by providing objective, supportable conclusions of value.
A Message from PJ Patel, Justin Johnson, and John Czapla
Like many of our clients and partners, VRC’s entire team is working remotely as our offices have closed due to the COVID-19 pandemic. We are taking measures to ensure the continuity of client service and meeting client deadlines, while also protecting the health and wellness of our colleagues and communities.
We are continuing to confidently support clients with a fully remote workforce and remain connected and committed to you as always.
To our clients in industries that are both essential and critical in maintaining and supporting the infrastructure of our communities worldwide, we express our deepest gratitude.
COVID-19 Spotlight on Private Equity Impacts
Considering the novel coronavirus impact on private equity as an inverse of the dot-com era
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.
While the extremes of the late 1990s were directionally different in that public market valuations were running up instead of cascading down, it is worth noting that both then and now, the large swings were irrational and based more on speculation about future business prospects than objective financial data. Those of us who advise privately held companies and their stakeholders on valuation are finding that, as in the era of Blackberry phones, Pets.com and company foosball tournaments, there is no substitute for experience and judgment when it comes to evaluating private companies in the age of the novel coronavirus.
Hard Data Is Always Better than Judgment
While good judgment is important, it should be stipulated upfront that the best advice we can offer clients given the ongoing uncertainty about the course of the pandemic and its long-term impact on the economy is, whenever possible, wait. Just as hospitals are postponing elective surgeries until the public health situation settles down, companies should consider holding off on elective financial analysis, such as…
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.
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.
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.
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.
Questions About Valuation Impacts?
Visit our Contact Us page to submit your questions, concerns, or details about an upcoming valuation engagement need. A VRC valuation professional will reach out to you upon receiving your inquiry.
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.
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.
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.
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?
Disruptions to Leave Mark on Financial Reports
Effects of the Coronavirus to show in risk factors, revenue, goodwill impairments, and other areas of financial reporting.
Webcast Replay: Is COVID-19 a Triggering Event?
In this segment from VRC’s recent webcast, PJ Patel and Larry Van Kirk share important insights into recent conversations they’ve had with public and private company clients related to determining if the coronavirus is a triggering event requirement goodwill impairment testing in Q1 or Q2 2020.
COVID-19 and Global Valuation Impacts | Webcast Replays from VRG
Webcast: Spotlight on China, India, Spain and the U.S.
The member firms of Valuation Research Group (VRG), the global professional valuation arm of VRC, offer a unique perspective of their economies and markets as they’ve been feeling the impacts of the Coronavirus. Watch the first of our three recorded webcast sessions featuring a spotlight on pandemic-related market developments in China & Hong Kong, India, Spain, and the U.S.
+ Click to Watch VRG’s Entire Webcast Session or Select a Video Chapter Below for a Specific Segment:
2:12 – 15:10 Economic and market impacts
15:00 – 26:46 Proposed government economic measures
26:47 – 34:36 Lifting work/travel restrictions
34:41 – 36:49 Impacts on professional valuation firms, audit firms and business in general, worldwide
36:50 – 46:14 Valuation Impacts (Impairments, Solvency, etc.)
46:15 – 50:18 Final panelist thoughts on the impacts of COVID-19
Webcast: Spotlight on Australia, Canada, and the U.K.
Watch the second recorded replay of our three webcast sessions featuring a spotlight on pandemic-related market developments in Australia, Canada, and the U.K. featuring:
+ Click to Watch VRG’s Entire Second Webcast Session or Select a Video Chapter Below for a Specific Segment:
2:17 – 20:27 COVID-19 socio-economic and market impacts
20:28 – 33:29 Government Economic Measures
32:08 – 41:59 Valuation Impacts (Impairments, Solvency, etc.)
42:00 – 46:07 Final panelist thoughts on the impacts of COVID-19
Webcast: Spotlight on Argentina and Brazil
Watch the third and final of our three recorded webcast sessions featuring a spotlight on pandemic-related market developments in Argentina and Brazil.
+ Click to Watch VRG’s Entire Webcast Session or Select a Video Chapter Below for a Specific Segment:
1:55 – 11:54 Economic and market impacts
11:55 – 14:02 COVID-19 Social Impacts, estimated returns to work, lifting travel restrictions
14:02 – 31:45 Valuation Impacts (Impairments, Solvency, etc.)
31:46 – 39:52 Final panelist thoughts on the impacts of COVID-19
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.
Marlin Equity Partners has merged Whitlock with AVI-SPL. VRC provided a fairness opinion in connection with the transaction.
VRC provided a fairness opinion to the board of directors of Industrial Services of America Inc. in connection with a transaction with River Metals Recycling LLC.
VRC provided a fairness opinion to the board of directors in connection with the acquisition of WatchGuard, Inc. by Motorola Solutions, Inc.
VRC provided a solvency opinion to the board of directors of BJ’s Wholesale Club.
CORA Physical Therapy has been recapitalized by Gryphon Investors. VRC provided a solvency opinion to the company’s board of directors in connection with the transaction.
Prospect Medical Holdings has been recapitalized by Leonard Green & Partners, LP. VRC provided a solvency opinion to the company’s board of directors in connection with the transaction.
More Valuation Insights from VRC
COVID-19 Real Property, Virtual Valuations
Due to the current situation with the spread of the novel Coronavirus, we are unable to perform these valuable on-site inspections. Various states have announced “stay at home” orders, which is limiting our travel for the time being. However, our team is still able to complete our valuations with the help of some modern tools.
COVID-19 Valuing Tangible Assets from a Distance
Even if we could get to the sites with the travel restrictions and taboos brought about by the Coronavirus, the facilities might be temporarily closed. It’s unfortunate because these visits can be beneficial. But, the challenge is surmountable.
Cross-Border Tax Planning and Asset Transfers
In-house tax executives have seen the valuation approaches in tax-sensitive restructurings or strategic transactions of multinational enterprises becoming more sophisticated as increasingly aggressive tax authorities seek to contextualize the value of local assets and entities across the entire company.
Does My Company Need a Section 409A Valuation Review?
If your company has, or is about to offer incentive equity to employees or others, then founders cannot afford to disagree on necessary support documentation. A company is best served by obtaining a Section 409A valuation, which is an appraisal of the fair market value of your company’s common stock.
Best Practices in Accounting for M&A Transactions (Part 1)
In the first episode of VRC’s video series, we discuss determining the purchase price allocation in the deal, earnout structures, and rollover equity.
Best Practices in Accounting for M&A Transactions (Part 2)
In the second episode of VRC’s video series, we discuss non-controlling interest in private equity deals and step acquisitions.
Continued Updates and Coverage
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