On July 20, 2016, Novation Companies and its subsidiaries (Novation or the Debtors) filed a Chapter 11 Plan of Reorganization (Plan). Prior to 2008, Novation (f/k/a NovaStar Financial, Inc.) originated, securitized, sold, and invested in residential nonconforming mortgage loans and mortgage securities. After Novation had ceased their lending operations, the Debtors engaged in the business of acquiring and starting up various businesses. The Plan indicated Novation’s intention to use cash from the disposition of the legacy portfolio of residential mortgage-backed securities to fund payments required under the Plan and to acquire a healthcare staffing solutions business.

Novation retained NERA in In re: Novation Companies Inc., et al., United States Bankruptcy Court for the District of Maryland to opine on the valuation of highly illiquid mortgage-backed securities including residual interests and overcollateralization certificates.

NERA estimated the expected future cash flows of the Certificates based on an analysis of the future performance of the mortgage loan collateral underlying the securities, as well as the waterfall of each Trust, which represents the rules that determine the priority of payments for the securities in each Trust. NERA employed several valuation approaches including a fundamental approach which made use of regression models for prepayment, default, and severity rates. In addition, NERA analyzed the waterfall and structure of each Trust using Intex as well as an in-house modeling of the rules and priorities of the allocation of the collateral proceeds to the certificates in the form of interest and principal payments. 

The Bankruptcy Court held a confirmation hearing for the Plan which was contested by some of the creditors on 31 May 2017. The Court qualified Managing Director Dr. Faten Sabry as a valuation expert and admitted her expert report and testimony in evidence on behalf of the Debtors. The valuation of the fixed income securities by Dr. Sabry was a key component of the Debtors’ Plan. At the end of the contested confirmation hearing, the Bankruptcy Judge approved the Plan of Reorganization.