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).

 

RELATED TERMS
  1. Recovery Rate

    Recovery rate is the extent to which principal and accrued interest ...
  2. Capital Recovery

    1. The earning back of the initial funds put into an investment. ...
  3. Accelerated Cost Recovery System ...

    The accelerated cost recovery system was a U.S. federal tax break ...
  4. Economic Recovery

    An economic recovery is a period of increasing business activity ...
  5. Business Recovery Risk

    Business recovery risk refers to a company's exposure to loss ...
  6. Jobless Recovery

    A jobless recovery refers to when economic growth post-recession ...
Related Articles
  1. Insights

    The Best Business To Be In During A Recovery (And Why)

    Where are the best places to be when an economy starts to recover?
  2. Trading

    The 6 Signs Of An Economic Recovery

    For all the talk of whether the economy is recovering or sinking, what should a recovery actually look like?
  3. Investing

    Most U.S. Homes Worth Less Than Before the Recession...Still

    Two out of three U.S. homes are worth less than in 2007.
  4. Insights

    The American Recovery Act: 8 Years Later

    Eight years ago today, Obama signed the $787 billion stimulus package in the midst of the Great Recession. How has the economy performed since?
  5. Insights

    Asset Recovery Companies: Don’t Be Scammed

    Victims of money scams have even more to worry about than their lost assets: the real risk of getting scammed again, by a so-called asset recovery firm.
  6. Financial Advisor

    The Top ETFs For a Fast Recovery After a Recession

    Recession and recovery cycles are imminent in the markets. Here are the ETFs, which provide the best performance for a fast recovery after a recession.
  7. Insights

    Stock Market Woes: The Recovery Eats Its Children

    A momentary blip? Or a sign of the "Big Rotation"?
  8. Insights

    Analysts: Chipotle's Recovery Reflected in Price

    Analysts say Chipotle's recovery from the 2015 E. coli scandal is already fully priced in.
  9. Investing

    Cheap Stocks or Value Traps?

    The value of stocks that trade at less than cash per share can be deceiving.
  10. Insights

    When Will the Recovery End?

    The U.S. economy is running out of the capacity to sustain growth. Two measures are especially revealing in this regard: the Federal Reserve’s (Fed’s) measure of industrial capitalization and ...
RELATED FAQS
  1. When do you use installment sales method vs. the cost recovery method?

    Take a deeper look at the installment sales method and the cost recovery method of recognizing business sales revenue and ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center