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Solvency Opinion

A solvency opinion (valuation analysis) is required by sellers and new creditors to a leveraged transaction involving a company recapitalization. Due to concerns about fraudulent conveyance, parties to the deal will get an independent assessment and solvency opinion regarding how the transaction debt impacts working capital, cash flow and equity value.

Fraudulent conveyance is at issue and may be part of a lawsuit if there is intent to hinder, delay or defraud a creditor or interested party. The ultimate test is whether the valuation/solvency opinion can be supported in a civil or bankruptcy court. To uphold a claim, the court must find that the exchange was not for "reasonably equivalent value."

Positive solvency opinions are essential to a Board of Directors in leveraged buyouts, recapitalizations, dividends, or similar situations involving nominal or insufficient equity. The Mentor Group analysis provides the parties to a transaction with an unbiased due diligence and assurances that bankruptcy should not occur. Lenders and creditors are more favorably inclined to offer more acceptable deal terms.

Leveraged deals may include a combination of secured and unsecured debt. The unsecured portion does not encumber assets. However, this position must be clearly supported by stable to increasing cash flows, and, if practical, by intellectual property value not shown on the balance sheet.

In order to issue a solvency opinion, we carefully scrutinize financial statements and projections to ensure that the company passes on each of the three tests shown below.

Cash Flow

Ability of the company to continue operations for the foreseeable future and satisfy its debt and financial obligations as they mature.

Balance Sheet

Assets exceed the amount of liabilities – the market value of the firm's assets, both on and off the balance sheet, must exceed the sum of its debt obligations. Total invested capital must exceed total liabilities after the transaction.

Capitalization

Debtor must be sufficiently capitalized to fund ongoing operations. A leveraged transaction must not leave the firm with an insufficient margin or equity cushion. This margin of safety should also protect against unplanned asset sales, material operational changes, debt restructuring, and external factors which subject the company value to heightened risk.

Categories: General

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