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A solvency analysis and opinion helps companies and their boards of directors steer clear of fraudulent transfers and illegal dividends or distributions.
State laws impose certain duties on boards of directors with respect to dividends, distributions and other transfers.
Dividends must be paid from surplus, and cannot leave the company insolvent or with insufficient capital.
A solvency opinion makes determinations as to whether, after giving effect to a transaction:
- The company’s assets exceed its debts;
- The company should be able to pay its debts as they come due;
- The company is not left with unreasonably small assets or capital; and
- There is sufficient surplus to effect a distribution.
These determinations arise from fraudulent transfer statutes and dividend prerequisites in state laws. Solvency analysis also provides a board and company management with valuable insight as to the equity and cash flow cushion with respect to its ongoing business.
Duff & Phelps Opinions practice is a globally recognized leader in solvency opinions. Since 2005, we have rendered more than 2,376 fairness and solvency opinions for transactions with an aggregate deal value of over $7 trillion.
Solvency Advisory Services
A solvency analysis and opinion can enhance the company’s or board’s analysis of any leveraged transaction or contemplated distribution. The types of applicable transactions include:
- Spin-offs and split-offs
- Corporate spin-off transactions are often done to release shareholder value and achieve other business purposes
- Dividend recapitalizations
- Solvency opinions from independent financial advisors are often written into credit agreements as a condition of closing
- Leveraged buyouts
- Debt refinancings
- Intercompany restructurings
- Large stock buybacks
Frequently Asked Questions
What is a solvency opinion?
- A solvency opinion is a collection of determinations on the valuation, capitalization, and cash flow generating ability of an entity immediately before and immediately following a transfer of assets and/liabilities, cash or stock dividend, or a leveraged transaction.
- Solvency opinions are designed to assist boards of directors in determining the legality of a proposed dividend or distribution, and/or to assist potential secured creditors in highly leveraged transactions.
What are common situations for a solvency opinion?
- Corporate spin-offs and split-offs
- Leveraged dividend recapitalizations
- Leveraged buy-outs
- Corporate restructurings
- Stock buybacks, including accelerated stock buybacks
What are the typical transactions where a fairness opinion may be needed?
- Corporate best practice
- Good corporate governance
- Comfort and assurance for directors
- Address legality of cash and stock dividends/distributions
- Defend against potential post-transaction fraudulent transfer/conveyance claims and/or breach of fiduciary claims
Solvency opinions are not:
- Accounting or tax opinions
- Fairness opinions
- Business valuation opinions, although solvency analysis includes valuation analysis
What type of financial analysis supports a solvency opinion?
Balance sheet test (Valuation analysis)
- Perform an enterprise valuation of the subject company using generally accepted valuation methodologies
- Deduct the stated value of the company’s liabilities, including all contingent liabilities identified to us by the company
- Analyze the “equity cushion” or the amount by which the assets exceed the liabilities, to determine whether the company would be left with a reasonable amount of capital for the operations of the business in which it is engaged
- If applicable, determine if the transaction has impaired the capital of the company (test for adequate surplus)
Cash flow test (Liquidity analysis)
- Develop detailed cash flow projections for the company that include the projected need for capital and the payment of debt obligations, including identified contingent liabilities, as they mature
- Analyze projected compliance with financial covenants contained in credit agreements, if applicable
- Calculate and assess leverage ratios, interest coverage ratios, and fixed charge coverage ratios over the projection period
- Conduct sensitivity analyses to ascertain the company’s ability to meet its debt obligations in a reasonable down-side scenario
For the valuation analysis supporting solvency/surplus opinions, what is the typical valuation standard?
- Common practice is to perform the valuation analysis on a market value basis, not book value.
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