COVID-19 & Valuation Challenges

As the impact of COVID-19 continues to ripple across the globe and affect the fundamental outlook of a wide array of sectors, the need to apply additional valuation techniques to estimate the fair value of investments is becoming increasingly necessary. The fair value must capture current market conditions. Fair value does not equal a “fire sale” price. − Valuation inputs such as performance metrics and/or future cash flows need to be adjusted for the impact of the crisis. − Greater uncertainty may translate into greater risk which may translate into greater required returns which may translate into lower asset values. − It may no longer be appropriate for recent transaction prices, especially those from before the expansion of the pandemic to receive significant if any, weight in determining fair value. The impact of the crisis on the company’s revenue/customers, supply chain, and operations must be rigorously considered. − Adjustments to performance projections and/or metrics are likely to be necessary to reflect current conditions and uncertainty in projections. − Scenario analysis is likely to be necessary to assess and incorporate the probability of the crisis extending for 3-, 6-, 12-, 18-months or longer. –

• Liquidity needs must be evaluated more than ever.
• What is the likelihood of a loan covenant breach?
• What is the impact of customers delaying payments or nonpayment and the impact on reduced cash flow?
• What is the source of working capital required to “restart” the business if impacted by the crisis?

A scenario analysis that weighs various potential outcomes (including the risk of default or potential government support) may be appropriate to assist in estimating fair value. − Par value or face value or cost value is not automatically fair value.