NEW YORK--()--Fundamental estimates of reorganization enterprise value (EV) or negotiated settlement values used in U.S. bankruptcy reorganization plans are critical to the success of an issuer's reorganization process, as discussed in a Fitch Ratings analysis of corporate bankruptcies.
This is the second edition of Fitch's series of bankruptcy case studies that provide valuation information and ultimate recoveries on claims by seniority. The median EV/forward EBITDA reorganization multiple was 6.1x for the sample. The case outcomes inform and validate Recovery-Rating analysis assumptions and provide information to market participants.
On average, the 75 defaulted issuers in Fitch's sample eliminated 68% of pre-petition debt through their bankruptcy processes, with debt reduction in 73 of 75 cases. Fifteen companies emerged with no debt outstanding due to being completely liquidated or emerging as going concerns with no debt.
The average debt/forward EBITDA leveraged ratio was 4.5x for the 60 companies for which a bankruptcy emergence leverage multiple was available. Fitch notes, however, that eight companies in the sample emerged with debt to EBITDA of 6x or higher. Insufficient debt reduction raises the risk of a second default.
Relative position in the capital structure was also a key determinant of recovery. First-lien creditors fared much better than junior creditors in terms of ultimate recoveries: 54% of the 99 secured claims (all priorities) received plan distributions that resulted in recoveries of at least 91% of the claim amounts. Creditor recoveries on unsecured debt were more widely distributed: 43% of the 71 unsecured issues received distributions of 10% or less of their claim amount and 16% recovered at least 91%.
Enterprise value is central to Fitch's speculative-grade rating process. For rated-entities with Issuer Default Ratings (IDRs) of 'B+' and below, Fitch performs a custom valuation analysis that results in a recovery estimate for each class of debt obligations.
The full report 'Case Studies in Bankruptcy Enterprise Values and Creditor Recoveries - Volume 2' is available at 'www.fitchratings.com.' The report provides valuation and recovery cases studies for 35 issuers and draws statistics from 75 cases in the U.S. corporate ultimate recovery database.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Case Studies in Bankruptcy Enterprise Values and Creditor Recoveries - Volume 2