The Dynamics of Adequate Protection in Falling Markets: An Auctioneer's Perspective
by: David Fiegel
GoIndustry DoveBid; Buffalo, N.Y.
Section 362(d)(1) of the Bankruptcy Code provides relief from automatic stay "for cause including the lack of adequate protection." Section 361 defines adequate protection as "providing either cash payments, an additional or replacement lien or 'such other relief as to provide an indubitable equivalent...of interest in such property.'" A secured creditor that is oversecured is often denied a motion to lift the automatic stay based on §362(d).
In the last six months, we have witnessed an unprecedented decline in asset values. According to L&M Publications, publishers of The Book (a widely-used guide to values that tracks auction sales), auction prices for metalworking equipment recorded from October to mid-December 2008 fell by 20 percent from the pricing levels recorded during the previous period of April through August 2008. Albeit not as steep, we have witnessed a continued decline in demand and value in the first quarter of 2009. The second quarter of 2009 has shown signs of stability, but at historic low values.
On the supply side, factors influencing this are many. Unprecedented plant closures are pumping used equipment into the market. Think for just a minute about what goes into constructing and furnishing a new home: wood, concrete, steel and other metals, plastics, fabric-the list is endless. The housing crisis was the first shoe to drop, as when the demand for new homes evaporated, so did the demand for the components. Now think about what goes into manufacturing an automobile: plastic, steel, fabric, wire, rubber, etc. The prodigious contraction of the automotive industry has already had an impact, and we have just begun to quantify the wreckage that will be left from the automotive bankruptcies.
The first obvious factors to influence the demand side are those mentioned in the preceding paragraph. Those users of machinery and equipment related to housing and automotive are no longer buyers, but sellers. The various industries that remain have shifted to survival mode, and most CAPEX is limited to emergency and survival-type investments. Used-equipment dealers, once the "safety net" for value at auction sales, have significantly scaled back their purchasing activity.
The market has changed in such a way so as to undersecure those that recently had adequate protection in their oversecured positions. As such, a prudent approach would be to revisit the current value of collateral to better reflect the changes of the last two quarters. Given the huge negative pressure on values recently, a creditor could expect a successful motion to lift stay under §362(d)(1), even where a similar motion has been recently denied.