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In the operating model, the NOLs should be used offset taxable income. There is a cap on how much of the NOL you can use in any given year. I believe it is about 4 or 5% per year of the total NOL. If you are looking to value the NOL stand-alone, then you can just project out the used NOL over a period of time and discount it back using the cost of equity.
Goalieman, you're missing the key point to the question. Generally speaking, to the extent an out of court restructuring produces cancellation of debt income, that will be taxable (there is a provision in the stimulus bill to modify this though). On the other hand, again, generally speaking, cancellation of debt income will not be taxable in a court approved plan of reorganization. The real answer though is ask a tax lawyer.
The other key issue to consider is a potential change of control, which would potentially wipeout the NOLs.
Ditto on the change of control.
NOLs themselves aren't all that complicated to model. Its the implications of various activities that change the applicability of the NOLs. Obviously you already know this, or you wouldn't have been asking the question.
The Company can potential keep all of its NOLs coming out of bankruptcy as long as there isn't a change of control within 2 years after the exit. The explicit period value isn't the issue it's the terminal value. If the Company's been losing money for a substantial period of time it coule have a shitload of NOLs to carryforward. Would you estimate what taxable income would be and discount the benefit of the NOLs seperately and add the result to your EV, or would you use an EBITDA multiple because that result would be inclusive of any NOL benefits?
At the end of the day there won't be a huge impact on the value, but want to be as accurate as possible.
Thanks guys
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Upon emergence from Chapter 11 if a change of ownership occurs (i.e. if stock ownership of 5% shareholders changes by more than 50%, change of ownership occurs - usually triggered by a debt for equity swap in any restructuring, or a significant equity infusion, or an acquisition of capital stock) then the company's NOLs and other capital losses would be limited pursuant to Sec. 382.
Recall in a restructuring you are resizing your capital structure to fit your reduced enterprise value, so if the old equity is wiped out via chapter 11 or if the common are heavily diluted following an aggressive capital injection out of court, then you probably have a change of ownership.
If you're client is restructuring out of court, if the restructuring results in a change of ownership via a debt for equity swap or some other arrangement with similar results, then you have to determine if the change of ownership condition has been met. It is possible to structure a restructuring (really a recapitalization) where you swap old paper for new paper with longer maturities and lower face value and maybe improved claim status such that the common equity guys are never diluted so the company in this case would never undergo a change of ownership, thus the NOLs if any are preserved. But you will probably trigger taxable COD income, which itself can be offset via your amount insolvency out of court (this is another area beyong the scope of your question).
If the change in ownership is trigerred out of court via an equity infusion, a stock acquisition, or an agressive debt for equity swap then you could potentially limit your NOLs and other capital losses pursuant to 382.
For your model, your NOL projection cannot exceed the 2 year carry back 20 year carryforward, and if limited by 382 just multiply the reorganization equity value upon emergence (or equity value as of swap date, if company is not in court) by the long term tax exempt rate set by the IRS, usually around 4-5%, then discount the tax savings at your cost of capital.
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