Solvency & Capital Adequacy

Solvency is broadly defined as the ability to meet debt obligations as they become due. A solvency analysis is a prudent and logical method of securing the correct level of assurance in leveraged buyout or other transaction. Three tests must be satisfied for an enterprise to be considered solvent:

  • The balance sheet test, which determines if the fair value of a company’s assets exceed its liabilities, with the assets valued on a going-concern basis
  • The cash flow test, which analyzes the company’s ability to service its debt load on a timely basis through expected earnings, additional borrowing capacity, or accumulated cash on hand
  • The capital adequacy test, which show if a company has enough capital to support internal operations in the face of a financial performance that falls short of expectations

Madison Street Capital’s experienced professionals have the expertise in valuations, the in-depth knowledge of bankruptcy laws, and deep and broad-ranging M&A experience to produce accurate and independent solvency opinions for boards of directors, lending institutions, equity sponsors, advisors, and other clients. We analyze historical and projected financial statements to identify all contingent liabilities such as letters of credit, convertible securities, tax liabilities, and pending litigation while thoroughly reviewing documents such as SEC filings, loan covenants, and operating plans. Our solvency opinions can establish a lender’s trust in making a loan, proffer a form of due diligence and evidence of good faith, and mitigate the risk of bankruptcy liability for all parties involved in a given transaction.

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