What Is Estimated Recovery Value (ERV)?

Estimated recovery value (ERV) is the projected value of an asset that can be recovered in the event of liquidation or winding down. The estimated recovery value (ERV) is calculated as the recovery rate times the 澳洲幸运5官方开奖结果体彩网:book value of the asset.

Estimated recovery values can vary widely depending on the type of asset, since the recovery rate for certain assets, such as cash, may be 100%, while the recovery rate for other assets, such as inventories and third-party advances, may only be far less (around 50%). In the case of a 澳洲幸运5官方开奖结果体彩网:liquidation event, the sum of estimated recover𒅌y values for all assets less administrative expenses for legal and trustee fees represents the net p🍌roceeds available to creditors.

Understanding Estimated Recovery Value (ERV)

Another way to define estimated recovery value is as a 澳洲幸运5官方开奖结果体彩网:mark to market (MTM) valuation of an asset that is based on the 澳洲幸运5官方开奖结果体彩网:net present value (NPV) of its expected cash flows. Based on this concept, this method of valuation is similar to the 澳洲幸运5官方开奖结果体彩网:F𓄧ederal Deposit Insurance Company's (FDIC) net present va🍬lue of the estimated cash recovery. Note that the estimated recovery value may differ significantly from the actual recovery value, depending on the accuracy of the estimated recovery rate.

Example of Estimated Recovery Value (ERV)

Assume that a company with $100 million in assets and $250 million in debt declares bankruptcy and is now in liquidation. How much can its creditors rec༺over?

Let us say that the company's asset base comprises the following assets with the corresponding recovery rates: Cash: $10 million (a 100% recovery rate); Accounts Receivable: $20 million (a 75% recovery rate); Inventories: $25 million (a 65% recovery rate); and Property, Plant & Equipment: $45 million (a 50% recovery rate).

The estimated recovery value for all of these assets is therefore: Cash: $10 million: Accounts꧙ Receivable: $15 million; Inventories: $16.25 million; and Property, Plant & Equipment: $22.5 million. The total estimated recovery rate is, therefore, $63.75 million.

Now let us also assume that the company's $250 million debt consists of $200 million in secured debt and $50 million in 澳洲幸运5官方开奖结果体彩网:subordinated or 澳洲幸运5官方开奖结果体彩网:unsecured debt. Secured creditors are always first in line to receive liquidation proceeds, with any remaining balance going to unsecured creditors. In this case, only the secured creditors will be in a position to receive liquida𓂃tion proceeds, since the total ERV is well below the level of secured debt. The estimated recovery rate for the secured creditors is therefore 31.9% ($63.75 million / $200 million).