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 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 liquidation event, the sum of estimated recovery values for all assets less administrative expenses for legal and trustee fees represents the net proceeds available to creditors.
Breaking Down Estimated Recovery Value (ERV)
Another way to define estimated recovery value is as a mark to market valuation of an asset that is based on the net present value of expected cash flow. Based on this concept, this method of valuation is similar to the Federal Deposit Insurance Company's (FDIC) net present value 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.
Estimated Recovery Value Examples
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 recover?
Let us say the company's asset base comprises these assets with the following 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: Accounts 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 in debt is comprised of $200 million in secured debt and $50 million in subordinated or 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 liquidation 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% (or $63.75 million / $200 million).