Key Valuation Issues in Distressed Investing

Crystal Ball

Key Valuation Issues in Distressed Investing

The valuation of relatively healthy companies involves many unknowns. However, the valuation of distressed companies includes additional elements of uncertainty. The Michel-Shaked Group’s Israel Shaked (Managing Director) and Brad Orelowitz (Senior Vice President) published an article in the Jan/Feb 2018 issue of the Turnaround Management Association’s Journal of Corporate Renewal discussing key valuation issues in distressed investing.

The distressed investor considers investing in securities of companies that are either in bankruptcy or are approaching bankruptcy. Typically, these companies have outstanding claims greater than the value of their assets and they are experiencing difficulty in servicing their debt. In these circumstances, there is a real possibility that the company will be liquidated or will be reorganized as a going concern.

The investor may be looking to acquire distressed debt or other securities in the hope that these securities will either increase in value following a liquidation or reorganization, or convert to equity ownership. These two possible outcomes, liquidation or reorganization, require the application of different valuation methods. However, there are many uncertainties that the distressed investor needs to consider.

These uncertainties resulting from distress impact all commonly used valuation methodologies. Several factors relating to the valuation of distressed companies as going concerns are discussed in the article.

A full version of this article can be seen here.