Estimated Recovery Value (ERV)

What Is Estimated Recovery Value (ERV)?

Estimated recovery value (ERV) is the projected value of an asset that can be recuperated 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 fluctuate widely contingent upon the type of asset, since the recovery rate for certain assets, like cash, might be 100%, while the recovery rate for different assets, for example, inventories and third-party advances, may just be undeniably less (around half). On account of a liquidation event, the sum of estimated recovery values for all assets less administrative expenses for legal and trustee fees addresses the net proceeds accessible to creditors.

Understanding Estimated Recovery Value (ERV)

One more method for characterizing estimated recovery value is as a mark to market (MTM) valuation of an asset that is based on the net present value (NPV) of its expected cash flows. Based on this concept, this method of valuation is like the Federal Deposit Insurance Company's (FDIC) net present value of the estimated cash recovery. Note that the estimated recovery value might vary altogether from the genuine recovery value, contingent upon the exactness of the estimated recovery rate.

Illustration of Estimated Recovery Value (ERV)

Assume that a company with $100 million in assets and $250 million in debt declares bankruptcy and is presently in liquidation. What amount can its creditors recuperate?

Let us say that the company's asset base includes the accompanying assets with the relating 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 and Equipment: $45 million (a half recovery rate).

The estimated recovery value for these assets is in this manner: Cash: $10 million: Accounts Receivable: $15 million; Inventories: $16.25 million; and Property, Plant and Equipment: $22.5 million. The total estimated recovery rate is, consequently, $63.75 million.

Presently let us likewise assume that the company's $250 million debt comprises of $200 million in secured debt and $50 million in subordinated or unsecured debt. Secured creditors are in every case preferred choice to receive liquidation proceeds, with any excess balance going to unsecured creditors. In this case, just 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 hence 31.9% ($63.75 million/$200 million).

Features

• Creditors must realize the estimated recovery value of assets in a company that they loan money to so they can project their losses in the event of a liquidation.
• Estimated recovery value can likewise be seen as the mark to market valuation of an asset based on its net present value.
• Estimated recovery value (ERV) is the projected value of an asset that can be recuperated in the event of a liquidation or wind down.
• The calculation for estimated recovery value is the recovery rate increased by the book value of the asset.