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Solvency Opinions

Solvency opinions are often required by lenders in connection with an LBO or leveraged recapitalization as evidence, on their behalf, that in the event of a subsequent bankruptcy, (i) the additional obligations incurred and security interests conveyed by the debtor to the lender did not constitute a constructive fraud on pre-transaction creditors of the debtor, and (ii) the lender acted both in good faith and with reasonable prudence in making the loan to the debtor.

Solvency opinions analytically address whether an intended debtor, upon incurring the indebtedness associated with a leveraged transaction, would be rendered both currently and prospectively insolvent thereby (the balance sheet test), would be left with inadequate capital with which to engage in its business (the capital adequacy test), or would have cash flows insufficient to meet its current and prospective obligations as they matured and became due (the cash flow / fixed charge coverage test).