The American Bankruptcy Institute (ABI) Commission to Study the Reform of Chapter 11 recently undertook a lengthy study to identify ways to improve the process of reorganization. The commission's final report and recommendations made proposals regarding different facets of the chapter 11 process. A recent AIRA Journal article, authored by Principal Chris Feige and Konstantin Danilov, focuses on one of these proposals, the so-called "redemption option."
In " The Redemption Option: Discussion and Valuation Considerations from the ABI Commission's Proposed Chapter 11 Reform " (Vol. 29, No. 4, 2015), the authors describe the rationale behind the proposal and the technical aspects of its application in practice. "The redemption option is a proposal intended to correct potential unfairness resulting from the valuation of a reorganized company on one particular date during chapter 11 proceedings. Because a reorganized firm's value is often crystallized during a downturn in the economy, senior creditors often get the majority of the equity in the reorganized firm, and therefore capture the firm's future upside, while junior creditors and equity holders receive nothing," the authors explain. The junior stakeholders "therefore have an incentive to delay the confirmation of the reorganization plan, in hopes that the reorganization value increases, and they can negotiate to receive some value. The redemption option seeks to remedy this by paying junior creditors for the potential future upside they forgo when they accept the reorganization valuation as of a certain date."
The authors also describe the step-by-step calculation of the residual option value using a real-world example. They note that although the use of "call option framework to model the value of the implicit option held by junior creditors is a valid approach," the calculation of the value "is heavily dependent on assumptions about volatility." The authors conclude that there will likely be significant disagreement between opposing stakeholders regarding the valuation of the residual option, which will likely necessitate expert input and may result in additional litigation.
Associated People
Chris Feige
Mr. Feige specializes in the areas of finance, securities, and financial markets. He has worked on and managed a range of securities and valuation projects in the UK and Europe. Mr. Feige has been appointed as expert in Dutch court to provide valuation and securities claims reports in support of Steinhoff’s global securities settlement, and gave evidence in the Dutch Enterprise Chamber regarding the valuation of Getir. He has also managed teams evaluating shareholder reliance and disclosure materiality and estimating counterfactual share prices in UK Financial Services and Markets Act (FSMA) Section 90A litigation matters. Mr. Feige has supported experts analyzing the volume of false and spam accounts on Twitter, Twitter’s information security infrastructure, Twitter’s data privacy and compliance with a US Federal Trade Commission (FTC) consent decree, and share price and valuation issues on behalf of Twitter in Twitter v. Musk in which Elon Musk eventually purchased Twitter at his initial offer price. In cases involving alleged market manipulation in the foreign exchange (FX) and IBOR markets, he has analyzed trade data and evaluated alleged manipulation strategies. Mr. Feige worked on USA v. Richard Usher, et al., and the Foreign Exchange Class Antitrust Litigation, analyzing FX trade and chat data, as well as competition issues; preparing experts for testimony at trial; and providing data analyses and consulting support to counsel throughout the projects. He has also worked on a range of international arbitration cases, including valuation, damages, and competition analyses. In addition, he has developed complex valuation models, including discounted cash flow models, and analyzed asset-backed securities, collateralized debt obligations, and other securitized products in support of expert testimony in a number of bankruptcy and damages matters. Mr. Feige has also worked on a number of international arbitrations valuing defaulted sovereign debt, expropriated oil fields, and retail operations. His work has been published in several industry journals.