Recently making news for their role in a number of high-profile failed buyouts, solvency opinions have become a hot topic for transaction professionals. In a new study released by mergermarket in association with Houlihan Lokey, the percentage of respondents who believed that solvency opinions will often have a direct impact on the terms or completion of a transaction over the next year nearly doubled compared to those who believed solvency opinions had this strong an impact before the onset of the credit crisis. This shift in sentiment underscores a rising importance of these types of opinions for transaction professionals and boards of directors worldwide.
The study, conducted during the third quarter of 2009, compiles interviews of senior corporate executives, private equity practitioners and lawyers from the US and Europe regarding their recent and historical experience with solvency and related valuation opinions.
A solvency opinion is a financial opinion issued typically at the close of a transaction that addresses certain financial tests of solvency. The opinion is often required by boards and/or lenders as additional protection in the case of a subsequent fraudulent conveyance claim. An overwhelming number of respondents—86% in Europe and 82% in North America—believed that M&A professionals have become more aware of solvency and fraudulent conveyance issues over the past two years, most likely due to the sudden appearance of the solvency opinion in business headlines.
Further, 78% of respondents said that the valuation process has been directly impacted by poor economic conditions, with the availability of financing and volatility in the equity markets cited as two variables that have a strong influence on the process.
“There is still a lot of uncertainty in today’s markets,” said Ben A. Buettell, Managing Director and Head of Houlihan Lokey’s Solvency Opinion practice. “In the transactions that are coming to market, buyers and lenders are taking a closer look at the valuations of assets and liabilities on a pre- and post-transaction basis. The study’s findings are in line with our observations that professionals are responding to ongoing market complexities and the growing concern that solvency opinions are more likely to be challenged in the future by spending more time on these valuation issues.”
The study also illuminates key differences between the market for solvency and related valuation opinions in Europe versus North America. Two-thirds of North American respondents reported to have been involved in a transaction that included a solvency opinion over the past three years, compared to just one-third of European respondents. However, three-quarters of European respondents expect demand for solvency opinions to increase in their region compared to only half of North American respondents, indicating that Europeans can expect to be hearing more about solvency and solvency opinions in the coming months.
E.W. “Sandy” Purcell, Managing Director and Co-Head of Houlihan Lokey’s Financial Advisory Services in Europe, commented, “While concepts of solvency and viability vary across the EU, we’re seeing a convergence around heightened concerns over solvency issues, both in and out of the transaction context. The regime varies across jurisdictions. For example, in France, the legal framework for solvency is still under development, while in Germany, directors of companies are obligated to file for insolvency if the company cannot pass the “cash flow test” (liquidity) projected over the next 24 months. Accordingly, directors will often hire an independent advisor to determine whether the company in question has in fact entered the “zone of insolvency.”
Perhaps most importantly, the study revealed a sense that solvency opinions have gone from being a “check-the-box” exercise, to a detailed, carefully handled analysis that “offers greater security from litigation post-transaction.”
Additional findings include:
- 82% of respondents say the process of projecting future cash flows has been directly impacted by poor economic conditions and uncertainties regarding a recovery.
- 76% of respondents expect the increase in demand for solvency opinions to be most significant for refinancings, while an additional 61% say asset sales will see the greatest increase in solvency opinion demand.
- 41% of respondents say solvency opinions will be used primarily to address concerns that the buyer is taking on more debt than it can service over the next 12 months.
For a complimentary copy of Solvency and Related Valuation Opinions, please visit http://www.hl.com/publications/solvencystudy/.
If you have questions regarding the study, members of the media should contact Hannah Bagshawe on +1 (646) 378-3194 or via email at Hannah.Bagshawe@mergermarket.com or Michelle O’Brien on +1 (212) 497-7802 or via email at MOBrien@HL.com.
About Houlihan Lokey
Houlihan Lokey, an international investment bank, provides a wide range of advisory services in the areas of mergers and acquisitions, financing, financial restructuring, and valuation. The firm was ranked the No. 1 M&A advisor for U.S. transactions under $2 billion in 2008 and the No. 1 U.S. fairness opinion advisor over the past 10 years by Thomson Reuters. In addition, the firm advised on more than 500 restructuring transactions valued in excess of $1.25 trillion over the past 10 years. Notable engagements cover numerous sectors and virtually all of the largest U.S. corporate bankruptcies, including Lehman Brothers, General Motors, WorldCom and Enron. The firm has more than 800 employees in 14 offices in the United States, Europe and Asia. Each year we serve more than 1,000 clients ranging from closely held companies to Global 500 corporations.
About mergermarket
mergermarket, part of The Mergermarket Group, is an unparalleled, independent M&A intelligence tool used by the world's foremost financial institutions to originate deals. It provides proprietary intelligence on potential deal flow, potential mandates and valuations via the world's largest group of M&A journalists and analysts who have direct access to the most senior decision-makers and corporates. Mergermarket Group has over 450 employees worldwide and regional head offices in New York, London and Hong Kong. The Mergermarket Group is a division of the Financial Times Group, publisher of the Financial Times newspaper and FT.com. The FT Group is a division of Pearson plc, the international media group. Visit us at www.mergermarket.com.
Contacts:
mergermarket
Hannah Bagshawe, +1 646-378-3194
Hannah.Bagshawe@mergermarket.com
or
Houlihan
Lokey
Michelle O’Brien, +1 212-497-7802
MOBrien@HL.com.
