Estimated Recovery Value (ERV)
What is 'Estimated Recovery Value (ERV)'
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 that for other assets like inventories and third-party advances may only be 50%. In a liquidation scenario, 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)'
Assume 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's say the company's asset base comprises these assets with the following recovery rates - Cash $10 million (100% recovery rate), Accounts Receivable $20 million (75% recovery rate), Inventories $25 million (65% recovery rate), Property, Plant & Equipment $45 million (50% recovery rate).
The estimated recovery value for these assets is therefore - Cash $10 million, A/R $15 million, Inventories $16.25 million and PP&E $22.5 million. The total ERV is therefore $63.75 million.
Let's also assume that the company's $250 million indebtedness comprises $200 million in secured debt and $50 million in unsecured debt. Secured creditors are 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).
Note that the estimated recovery value may differ significantly from the actual recovery value, depending on the accuracy of the estimated recovery rate.