successfully getting through the complexities of law and valuation presentation of damages cases n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies PowerPoint Presentation
Download Presentation
Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies

Loading in 2 Seconds...

play fullscreen
1 / 17

Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies - PowerPoint PPT Presentation


  • 97 Views
  • Uploaded on

Successfully Getting through the Complexities of Law and Valuation Presentation of Damages Cases. Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies London - February 27, 2013. Risks v. Uncertainty.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies' - azure


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
successfully getting through the complexities of law and valuation presentation of damages cases

Successfully Getting through the Complexities of Law and ValuationPresentation of Damages Cases

Manuel A. Abdala

International Dispute Resolution

Involving Russian and CIS Companies

London - February 27, 2013

risks v uncertainty
Risks v. Uncertainty
  • Frank H. Knight established the economic definition of the terms in his landmark book, Risk, Uncertainty, and Profit (1921):
  • Risk is present when future events occur with measurable probability
  • Risk typically related to probability of negative outcome (reducing value)
  • Risk, however, once it materializes, can either reduce or increase value
  • Uncertainty is present when the likelihood of future events is indefinite or incalculable
how to deal with risks and uncertainty market tests
How to Deal with Risks and UncertaintyMarket Tests
  • 1. Stock market prices reflect value
    • Billions of hourly stock trades set values, despite unknowns
    • Related damage valuation techniques:
      • Event studies - how stock would have evolved in the absence of certain events
      • Relative market multiples (comparable companies)
  • 2. Transactions reflect value
    • For tested party or on a relative basis (comparable companies)
    • Can also include value attributed to controlling stake
  • 3. Contracts on futures/options reflect value
    • Examples: Brent (crude oil), currencies, metals, commodities, etc.
how to deal with risks and uncertainty valuation assessments
How to Deal with Risks and UncertaintyValuation Assessments
  • DCF Method
    • Widely used by practitioners
    • Allows to isolate the impact of the breach
  • Other damage valuation techniques
    • Net capital contributions
    • Adjusted book values
    • NAV (mining)
measuring risks dcf exercise via discount rates
Measuring RisksDCF Exercise: Via Discount Rates
  • Standard sources of risks
    • Market risk (of holding equity)
    • Industry risk
    • Country risk
    • Currency (or depreciation / inflationary) risk
      • If discount rate is computed in local currency

Cost of Equity based on Capital Asset Pricing Model (CAPM):

Base Rate

(time value of money)

Currency

Risk

Market Risk

Cost of Equity = Risk Free + Beta (β) * (Market Return – Risk Free) + CRP + Other

Market Risk

Premium

Industry Risk

Country Risk

Premium

measuring risks dcf exercise market risk premium mrp
Measuring RisksDCF Exercise: Market Risk Premium (MRP)
  • Difference Between Equity Yields and Debt Yields

Source: Own Production based on Prof.AswathDamodaran (http://www.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xls).

measuring risks dcf exercise industry risk beta
Measuring RisksDCF Exercise: Industry Risk (Beta)
  • Volatility Differential: Oil and Gas v. Market, Beta (β) Parameter

Source: Own production based on Yahoo Finance.

measuring risks dcf exercise country risk premium
Measuring RisksDCF Exercise: Country Risk Premium
  • Sovereign Spreads Over US Treasury Bonds

Source: Own production based on Federal Reserve Bank for U.S. yields and IHS Insight for EMBIs.

measuring risks dcf exercise country risk premium1
Measuring RisksDCF Exercise: Country Risk Premium
  • Kazakhstan’s EMBI Spreads

Source: Own production based on IHS Insight.

measuring risks dcf exercise currency risk
Measuring RisksDCF Exercise: Currency Risk
  • Relationship between Spot and Future Exchange Rates

Source: Own production based on CME Group for future rates and OANDA for spot rate.

measuring risks dcf exercise other risks
Measuring RisksDCF Exercise: Other Risks
    • Project specific risks:
      • Regulatory risk
      • Taxation risk
        • Tax stabilization clauses
      • Liquidity distress / bankruptcy risk
      • Size premium
      • Pre-completion risk
        • Real Estate projects
        • Start ups
  • Caution: Possibility of double counting risks
    • E.g., country risk can include several risks such as regulatory/taxation
measuring risks arbitral tribunal s recognition of risks adders
Measuring RisksArbitral Tribunal’s Recognition of Risks Adders
    • Alpha Projektholding GMBH v. Ukraine (ICSID Case No. ARB/07/16)
  • “In calculating interest to update the damages claim to February 2009, Claimant’s damages expert applied the 12 month LIBOR rate, compounded annually. The Tribunal concludes that a more appropriate rate is the risk-free rate plus the market risk premium…The Tribunal believes that this rate better reflects the opportunity cost associated with Claimant’s losses, adjusted for the risks of investing in Ukraine.” (emphasis added)
    • EDF International S.A. et al. v. Argentine Republic (ICSID Case No. ARB/03/23)
  • “The Tribunal finds that the CAP Model is widely used to calculate the cost of equity…
  • The Tribunal understands that the time value of money is represented by the risk-free rate…
  • The Tribunal understands the market risk premium as the extra return that the market provides over the risk-free rate to compensate for market risk…
  • When involving investment in emerging countries such as Argentina, the cost of equity must account for a country risk premium.” (emphasis added)
measuring risks dcf exercise via p robabilistic scenarios in cash flows
Measuring RisksDCF Exercise: Via Probabilistic Scenarios in Cash Flows
  • Construction of different scenarios:
    • Based on the DCF valuation model structure
    • Tree decision kind of reasoning
    • Assigning weights to potential outcomes
    • Running Montecarlo simulations
  • Discount each scenario at the risk free rate
    • Each scenario has some likelihood, the multiplicity accounts for the risks
  • Cautions:
    • Introduction of subjectivity
      • Which variable is independent and random?
      • What is its probability distribution?
    • Less generally used by practitioners
measuring risks dcf exercise tree decision logic
Measuring RisksDCF Exercise: Tree Decision Logic

Year 0

Year 1

Year 2

Year T

CF2uu

CF1u

CF2ud

CF0

CF2du

CF1d

CF2dd

conclusions risks and uncertainty
Conclusions: Risks and Uncertainty
  • Markets deal with uncertainty all the time
    • Does not necessarily preclude the assessment of value
    • Only very rare assets are very difficult to value
      • Yet, one can organize an auction and prompt revealed preferences
  • Markets/valuators can quantify the impact of risks on value
    • Via market tests
    • Via valuation assessments
structuring the claim defense quantum expert considerations
Structuring the Claim/Defense Quantum Expert Considerations
  • Expert selection
    • Industry specific expertise
    • Damages/Compensation valuation expertise
    • International Arbitrations expertise (written and oral testimony)
  • Relationship between fact witnesses and expert testimony
    • Assuring consistency
  • Practical challenges / expert – client relationship