Solvency Opinions and Who Relies on Them

What this topic is

A solvency opinion is a letter from a valuation firm stating that, immediately after and giving effect to a transaction, a company will be solvent on a fair-value basis, will not have unreasonably small capital for the business it is engaged in, and will be able to pay its debts as they mature. The three conclusions track the three financial-condition tests in the fraudulent-transfer statutes. It is delivered at closing, addressed to a defined set of recipients, and hedged by several pages of assumptions and limitations that are as important as the conclusion.

Why it matters

The opinion is the single document most often waved after a failed leveraged transaction, and it is systematically over-read. It is not a guarantee, not an audit, and not a safe harbour. It rests on management projections it says it did not independently verify. Its greatest value is to directors, as evidence of good-faith reliance on an expert — and that is a different thing from protecting the transaction itself. Knowing what it does and does not carry changes how you negotiate for it, and what you do in addition to it.

Who should learn it

Directors approving a leveraged transaction, sponsors and CFOs commissioning the opinion, lenders whose closing conditions require it, distressed investors assessing the strength of an estate's avoidance claims, and litigators on either side of one.

What you will understand

• The three opinions inside a solvency opinion, and how each is actually computed
• Why the assumptions and limitations section governs the value of the letter
• Who is permitted to rely on it, and what happens to everyone else
• How solvency opinions have fared under examination, and what makes one hold up

Prerequisites

• The New Value Exception
• Distressed Acquisitions

Common misconception

"We got a solvency opinion, so the transaction is protected from fraudulent-transfer attack." It is not. The opinion is evidence a court weighs, and its weight depends entirely on the quality of the inputs. Because the opinion expressly assumes without verification that management's projections were reasonably prepared and reflect the best currently available estimates, an attack on the projections is an attack on the opinion. A well-supported opinion built on tested projections is genuinely persuasive. An opinion delivered in four weeks on a plan case nobody stress-tested is a fee, not a defence.