CTA Business Valuation in Distressed Situations 2 — Questions and Answers
Question 1: The 'enterprise value to EBITDA' (EV/EBITDA) multiple is particularly challenging to apply to distressed companies because:
- EBITDA is not a US GAAP metric
- Distressed companies often have negative or highly distorted EBITDA (Correct answer)
- It is banned by bankruptcy courts
- It requires audited financials unavailable during restructuring
Correct answer: Distressed companies often have negative or highly distorted EBITDA
Distressed companies frequently have depressed or negative EBITDA due to the financial crisis itself, making trailing multiples unreliable without normalization adjustments.
Question 2: Which of the following best describes 'enterprise value' in a restructuring context?
- The total market capitalization of the company's stock
- The total value of the business available to all capital providers, calculated before deducting debt (Correct answer)
- Book value of equity per the balance sheet
- The replacement cost of all physical assets
Correct answer: The total value of the business available to all capital providers, calculated before deducting debt
Enterprise value represents the total going-concern value of the business operations, from which senior claims are subtracted in a 'waterfall' to determine recoveries by class.
Question 3: When using precedent transaction analysis for a distressed company, analysts should:
- Only use transactions involving healthy companies for clean comparisons
- Include distressed M&A transactions as comps since they reflect the current situation (Correct answer)
- Use historical book value as the primary benchmark
- Exclude all transactions completed during economic downturns
Correct answer: Include distressed M&A transactions as comps since they reflect the current situation
Distressed precedent transactions provide the most relevant valuation benchmarks because they reflect similar risk profiles, buyer motivations, and market conditions.
Question 4: A 'haircut to par' in bond valuation means:
- The bond is trading at face value
- The bond trades below its stated face value, reflecting credit distress (Correct answer)
- Interest payments have been fully current
- The bond has been called by the issuer
Correct answer: The bond trades below its stated face value, reflecting credit distress
Distressed bonds trade at a discount to par value because the market prices in the risk of payment default or recovery of less than 100 cents on the dollar.
Question 5: In a US restructuring, 'cramdown' allows a reorganization plan to be confirmed even though:
- The company is insolvent
- One or more dissenting classes of creditors have not voted to accept the plan (Correct answer)
- The CEO refuses to sign the plan
- The company has no employees remaining
Correct answer: One or more dissenting classes of creditors have not voted to accept the plan
Cramdown allows the bankruptcy court to confirm a plan over the objection of a dissenting class, provided the plan meets specific statutory fairness standards.
Question 6: Which factor most increases the valuation discount applied to a distressed company versus a healthy peer?
- Strong management team continuity
- High customer concentration and dependency on relationships that may not survive restructuring (Correct answer)
- Recent revenue growth
- Low leverage ratio
Correct answer: High customer concentration and dependency on relationships that may not survive restructuring
High customer concentration creates significant enterprise value risk because key customers may defect during the distress period, making the business harder to sell at full value.
CTA Business Valuation in Distressed Situations 2
The 'enterprise value to EBITDA' (EV/EBITDA) multiple is particularly challenging to apply to distressed companies because: