Interestingly, the court decided this issue on a motion to dismiss. It did not, however, set forth in its opinion how it valued the interest rate increase, on the one hand, or the "breathing room," on the other. Other courts may not be as willing to reach such conclusions without more quantitative analysis on the relative valuations.20 We thus turn to how valuation theory and methodology assist in determining the value of forbearance.
The Financial Introduction
Greek orator Antiphon noted more than 2,000 years ago that "the most costly outlay is time." Hundreds of years later Benjamin Franklin transformed this into its common form when he wrote: "Remember that time is money. He that idly loses five shillings' worth of time loses five shillings, and might as prudently throw five shillings into the sea." Indeed, perhaps in no time in history has the adage "Time is Money" been more true than today.
However, if time is money, can the two be equated mathematically? Indeed, fundamental to valuation theory is the concept that an asset's value must incorporate the risks inherent from the passage of time. Value, generally, is the present value of expected future cash flows. To arrive at that present value, one must apply reasonable financial theory to compensate for the passage of time and the expectation that there is risk in the outcomes that may be achieved in the future.
In the context of distressed businesses, there are often strategic risks that are faced and critical decision points. The results of these decisions may result in businesses surviving or failing. The efforts to restructure a business can involve many parties working together to preserve what value may exist in the business, or can be realized from its liquidation or sale. For lenders, one common consideration is forbearance—simply defined as "a refraining from the enforcement of something (as a debt, right, or obligation) that is due."21 However, conceptually, if the lender provides a business with forbearance, it must receive something in exchange of reasonably equivalent value. This, of course, raises the question: What is the value of forbearance. From the perspective of the debtor, one could ask "What would a buyer pay for this option in the market?" or "What would the company pay to secure this option?"22 Of course, the answer involves a complex analysis of specific facts and circumstances. A complete review of the methods utilized and information considered for such an analysis is certainly beyond the scope of this article. However, certain concepts and calculations are worth considering.
One of the complexities in determining the value of forbearance is that one must consider several perspectives and several potential outcomes. Put simply, the value of forbearance could be conceptualized as the difference between the present value of expected future cash flows if forbearance is provided and the same in the circumstance where forbearance is not provided. One could certainly interpret the opinions of the court in In re Positive Health Management and In re Propex, above, as reflective of this perspective. While the courts did not offer a mathematical or financial method to determine this value, they suggest that had the forbearance not been extended, the circumstances would have been very different, suggesting that value could be measured by the difference.
For these situations, valuation techniques can be employed that consider the decision-tree of reasonable outcomes. Decision tree valuation techniques can be employed in a wide array of circumstances, each having certain similarities:
• Real options23
• Valuation of claims arising out of litigation
• Valuation of contingent assets/liabilities
For each of these, the valuation practitioner typically considers certain assumptions or inputs to the calculation of value. While the specifics of each methodology may include or exclude certain factors, generally, the practitioner considers:
• The different events that are likely to occur under certain scenarios
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