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Tuesday, 29 July 14
GENCO: DRY BULK SHIPPING VALUATIONS NO LONGER ANCHORED TO DISCOUNTED CASH FLOW METHOD - WEIL
 KNOWLEDGE TO ELEVATE
Discounted cash flow analysis is a mainstay among the valuation methodologies used by restructuring professionals and bankruptcy courts to determine the enterprise value of a distressed business. Despite its prevalence, the United States Bankruptcy Court for the Southern District of New York recently concluded the DCF method was inappropriate for the valuation of “dry bulk” shipping companies. In re Genco Shipping & Trading Limited. Although the bankruptcy court merely applied existing law to the facts of the case, the decision in Genco could serve as precedent for the valuation of companies in other segments of the shipping industry, or other industries, that experience significant volatility in rates.
Genco and the Prepackaged Plan of Reorganization
Genco Shipping & Trading Limited is a leading provider of maritime transportation services for “dry bulk” cargoes, such as iron ore, coal, grain, and steel products. Through its subsidiaries, Genco owns and operates a fleet of 53 vessels, which it contracts out to third-parties under fixed-rate or spot-market time charters.
In April 2014, Genco and certain of its affiliates commenced cases under chapter 11 of the Bankruptcy Code to implement a prepackaged plan of reorganization that would consensually restructure approximately $1.48 billion in secured and unsecured debt. The Genco plan provided the following key features:
- Approximately $1.2 billion of secured debt would be converted into equity in the reorganized company.
- New capital would be invested through a $100 million, fully backstopped rights offering.
- The maturities for two secured prepetition facilities would be extended.
- Allowed general unsecured claims would be reinstated and paid in the ordinary course of business.
- Existing equity holders would receive warrants for up to 6% of the equity in the reorganized company.
The plan garnered unanimous approval from Genco’s secured lenders and holders of its unsecured convertible notes.
The Genco plan was premised on an enterprise valuation between $1.36 billion and $1.44 billion. The debtors derived this range of values from a “Net Asset Valuation” analysis, a methodology commonly applied to shipping companies in non-bankruptcy contexts. An upcoming post will examine the bankruptcy court’s analysis of the NAV methodology in the bankruptcy context.
Equity Committee Contested Genco Plan Valuation
Less than three weeks into the bankruptcy, the U.S. Trustee appointed an equity committee, which was comprised of (i) Aurelius Capital Partners LP, (ii) Mohawk Capital LLC, and (iii) OZ Domestic Partners, LP (a/k/a Och Ziff).
The equity committee objected to confirmation of the Genco plan. It argued, among other things, that the debtors’ enterprise value was actually between $1.54 billion and $1.91 billion. The equity committee argued that, because the debtors were solvent under its valuation, existing equity holders were entitled to greater recoveries than those provided under the Genco plan. The equity committee derived its range of values from a weighted average of its DCF, comparable company, precedent transaction, and NAV analyses, with each weighted at 37.5%, 37.5%, 10%, and 15%, respectively
Bankruptcy Court Rejected DCF Methodology for Dry Bulk Shippers
To determine whether Genco’s enterprise value exceeded $1.48 billion, the amount at which existing equity holders would be entitled to any recovery, the bankruptcy court examined the testimony presented with respect to each of the four valuation methodologies. The bankruptcy court concluded that there were “many good reasons that the DCF method should not be applied here” and considered only the remaining three methodologies, ultimately determining that the debtors’ value did not exceed $1.48 billion.
The bankruptcy court began its analysis of the DCF methodology by explaining it briefly, as follows:
A discounted cash flow analysis entails estimating the periodic cash flow that a company will generate over a discrete time period, determining the ‘terminal value’ of the company at the end of the period, and discounting each of the cash flows and terminal value to determine the total value as of the relevant date.
Thus, even though a DCF analysis is a “traditional methodology,” it is of limited use when based on projections of future cash flows that are unreliable or difficult to ascertain. The bankruptcy court found that accurate cash flow projections did not exist for Genco, and it observed that the parties agreed on this point. In fact, the equity committee’s financial adviser testified that “shipping rates are volatile and the industry can be characterized as cyclical ….” In addition, the committee’s expert witness conceded that “[i]t is difficult to accurately forecast freight rates in drybulk shipping …. [and that] the drybulk market is dynamic and volatile.”
Interestingly, the bankruptcy court concluded not just that accurate projections were unobtainable in the case of Genco, specifically, but also for dry bulk shippers, generally. The bankruptcy court observed that the DCF method is inappropriate for the dry bulk shipping market because it is volatile and highly fragmented, has low barriers to entry, and little differentiation exists among competitors, causing charter rates to fluctuate with supply and demand and making revenues unpredictable. The bankruptcy court further noted that its market-wide concerns were exacerbated in the case of Genco because its longer-term charters are set to expire by October 2014, leaving the company entirely exposed to market volatility through spot-rate charters.
Equity Committee’s DCF Analysis Unpersuasive for Additional Reasons
Although the bankruptcy court found that “the volatility of the [dry bulk] industry is a sufficient basis by itself to reject a DCF analysis,” it proceeded to identify a number of particular problems with the equity committee’s DCF analysis that made it unpersuasive.
First, the bankruptcy court noted that the equity committee’s heavy reliance on its DCF analysis was internally inconsistent because the assumptions about future industry performance underlying the analysis were based on reports from equity analysts, most of whom did not utilize the DCF method in reaching their conclusions. Second, in written materials presented to Och Ziff prior to the bankruptcy filing, the financial adviser to the equity committee noted that the DCF method was not commonly used to value companies in the shipping industry.
The bankruptcy court also noted that, before being retained by the equity committee, the financial adviser to the equity committee prepared pitch materials for debtors in which it estimated a shortfall in Genco’s collateral value. The bankruptcy court made clear that it did not rely on this fact in reaching its decision, but mentioned it and other, similar statements that undermined the credibility of the testimony presented by the financial adviser to the equity committee. Third, the equity committee’s argument that DCF analyses were used in fairness opinions issued in connection with certain maritime M&A transactions was not compelling because other evidence suggested that those transactions focused more on the NAV methodology for purposes of valuation, and there was conflicting testimony on the usefulness of fairness opinions in the context of a contested hearing on valuation.
Finally, the bankruptcy court found that the testimony presented by the equity committee’s expert witness regarding shipping rate forecasts was “unpersuasive and less credible than that” presented by the debtors’ expert.
Lessons Learned
The prospective nature of the DCF method often allows parties to advocate for higher valuations on subjective and/or intangible grounds. The Genco decision is significant because it establishes a clear precedent rejecting the DCF method when determining the enterprise value of dry bulk shipping companies in bankruptcy. This precedent may reduce the leverage of parties, such as equity holders, that would benefit from a higher valuation of a dry bulk shipper.
The decision, however, will likely have farther-reaching consequences. Dry bulk is just one segment of the larger shipping industry, and many other segments share the characteristics that the bankruptcy court cited to support its conclusion that accurate projections were unobtainable. Similarly, shipping is not the only industry with notable volatility; other industries may soon be the next port of call for the Genco decision.
Source: Weil Gotshal & Manges LLP, Gabriel A. Morgan / Hellenic Shipping
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Monday, 11 August 14
INDONESIAN THERMAL COAL SWAPS SEEING SOME POSITIVE TREND
COALspot.com: Indonesian coal swaps for average September 2014 increased US$ 0.20 (+0.36%) day on day and US$ 1.30 (+2.41%) per mt week on week. Th ...
Monday, 11 August 14
SGX CFR SOUTH CHINA COAL SWAPS DIRECTION HEADING TO NORTH
COALspot.com: API 8 CFR South China Coal swap for delivery in September 2014 increased US$ 0.50 (+0.74%) day on day and US$ 1.55 (+2.33%)&nbs ...
Monday, 11 August 14
A TALE OF TWO TRADES - EVA TZIMA
COALspot.com: It has without a doubt been “a cruel, cruel summer” for the Dry Bulk market so far and with second hand values still stan ...
Sunday, 10 August 14
FREIGHT RATES FROM INDONESIA TO INDIA IS EXPECTED TO BE STEADY NEXT WEEK - VISTAAR
COALspot.com: This week the BDI and other segments saw some improvements. The BDI increased by 3.46 pct week on week and closed at 777 points.
...
Friday, 08 August 14
MINING DISPUTE IS CRIPPLING LOCAL ECONOMIES IN EASTERN INDONESIA - JG
- By Iwan Harsono -
It seems as if there’s no end in sight to the series of negotiations between the government and mining companies about ...
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- CNBM International Corporation - China
- Africa Commodities Group - South Africa
- Australian Commodity Traders Exchange
- ICICI Bank Limited - India
- Star Paper Mills Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Sinarmas Energy and Mining - Indonesia
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- Kumho Petrochemical, South Korea
- PetroVietnam Power Coal Import and Supply Company
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- Sical Logistics Limited - India
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- Samtan Co., Ltd - South Korea
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- Aditya Birla Group - India
- Kohat Cement Company Ltd. - Pakistan
- Mjunction Services Limited - India
- PowerSource Philippines DevCo
- Renaissance Capital - South Africa
- Bhatia International Limited - India
- Ministry of Finance - Indonesia
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- San Jose City I Power Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ind-Barath Power Infra Limited - India
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- Rashtriya Ispat Nigam Limited - India
- Electricity Authority, New Zealand
- Directorate Of Revenue Intelligence - India
- McConnell Dowell - Australia
- Bhushan Steel Limited - India
- Orica Mining Services - Indonesia
- Bukit Baiduri Energy - Indonesia
- Toyota Tsusho Corporation, Japan
- Mercator Lines Limited - India
- Bulk Trading Sa - Switzerland
- Anglo American - United Kingdom
- Merrill Lynch Commodities Europe
- Kapuas Tunggal Persada - Indonesia
- Port Waratah Coal Services - Australia
- Makarim & Taira - Indonesia
- Karaikal Port Pvt Ltd - India
- MS Steel International - UAE
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- Global Business Power Corporation, Philippines
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- Rio Tinto Coal - Australia
- The University of Queensland
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- Chamber of Mines of South Africa
- Planning Commission, India
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- Siam City Cement PLC, Thailand
- Holcim Trading Pte Ltd - Singapore
- Bayan Resources Tbk. - Indonesia
- Salva Resources Pvt Ltd - India
- Metalloyd Limited - United Kingdom
- Georgia Ports Authority, United States
- Binh Thuan Hamico - Vietnam
- Heidelberg Cement - Germany
- Romanian Commodities Exchange
- Wood Mackenzie - Singapore
- Baramulti Group, Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Gujarat Sidhee Cement - India
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- Chettinad Cement Corporation Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Miang Besar Coal Terminal - Indonesia
- Carbofer General Trading SA - India
- Neyveli Lignite Corporation Ltd, - India
- Globalindo Alam Lestari - Indonesia
- Dalmia Cement Bharat India
- Lanco Infratech Ltd - India
- Jindal Steel & Power Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Tamil Nadu electricity Board
- Electricity Generating Authority of Thailand
- Marubeni Corporation - India
- Larsen & Toubro Limited - India
- South Luzon Thermal Energy Corporation
- SMC Global Power, Philippines
- Therma Luzon, Inc, Philippines
- Gujarat Electricity Regulatory Commission - India
- Vizag Seaport Private Limited - India
- Videocon Industries ltd - India
- Singapore Mercantile Exchange
- Maheswari Brothers Coal Limited - India
- SN Aboitiz Power Inc, Philippines
- Price Waterhouse Coopers - Russia
- GVK Power & Infra Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- Bhoruka Overseas - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Karbindo Abesyapradhi - Indoneisa
- Sarangani Energy Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- Bukit Makmur.PT - Indonesia
- Posco Energy - South Korea
- Mercuria Energy - Indonesia
- Economic Council, Georgia
- Mintek Dendrill Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Coastal Gujarat Power Limited - India
- Ministry of Transport, Egypt
- Central Java Power - Indonesia
- Independent Power Producers Association of India
- Semirara Mining and Power Corporation, Philippines
- Essar Steel Hazira Ltd - India
- Semirara Mining Corp, Philippines
- Ministry of Mines - Canada
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- Edison Trading Spa - Italy
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Simpson Spence & Young - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Central Electricity Authority - India
- Commonwealth Bank - Australia
- The Treasury - Australian Government
- Indian Oil Corporation Limited
- Ambuja Cements Ltd - India
- Global Coal Blending Company Limited - Australia
- OPG Power Generation Pvt Ltd - India
- IHS Mccloskey Coal Group - USA
- India Bulls Power Limited - India
- Xindia Steels Limited - India
- Australian Coal Association
- Malabar Cements Ltd - India
- Latin American Coal - Colombia
- Jorong Barutama Greston.PT - Indonesia
- Banpu Public Company Limited - Thailand
- ASAPP Information Group - India
- Deloitte Consulting - India
- London Commodity Brokers - England
- Intertek Mineral Services - Indonesia
- Interocean Group of Companies - India
- Kepco SPC Power Corporation, Philippines
- Agrawal Coal Company - India
- Altura Mining Limited, Indonesia
- AsiaOL BioFuels Corp., Philippines
- Aboitiz Power Corporation - Philippines
- Jaiprakash Power Ventures ltd
- Sindya Power Generating Company Private Ltd
- Cement Manufacturers Association - India
- Maharashtra Electricity Regulatory Commission - India
- Vedanta Resources Plc - India
- Indonesian Coal Mining Association
- Thai Mozambique Logistica
- Pendopo Energi Batubara - Indonesia
- Standard Chartered Bank - UAE
- Sree Jayajothi Cements Limited - India
- Medco Energi Mining Internasional
- Uttam Galva Steels Limited - India
- Trasteel International SA, Italy
- Indogreen Group - Indonesia
- PTC India Limited - India
- Global Green Power PLC Corporation, Philippines
- Coalindo Energy - Indonesia
- Oldendorff Carriers - Singapore
- Energy Link Ltd, New Zealand
- Wilmar Investment Holdings
- IEA Clean Coal Centre - UK
- Cigading International Bulk Terminal - Indonesia
- Antam Resourcindo - Indonesia
- Eastern Energy - Thailand
- Kalimantan Lumbung Energi - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Eastern Coal Council - USA
- Indo Tambangraya Megah - Indonesia
- Coal and Oil Company - UAE
- Indian Energy Exchange, India
- Krishnapatnam Port Company Ltd. - India
- Savvy Resources Ltd - HongKong
- Minerals Council of Australia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Parliament of New Zealand
- PNOC Exploration Corporation - Philippines
- New Zealand Coal & Carbon
- Meenaskhi Energy Private Limited - India
- Power Finance Corporation Ltd., India
- Kartika Selabumi Mining - Indonesia
- Indika Energy - Indonesia
- Petron Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Manunggal Multi Energi - Indonesia
- International Coal Ventures Pvt Ltd - India
- Siam City Cement - Thailand
- Goldman Sachs - Singapore
- Formosa Plastics Group - Taiwan
- Sojitz Corporation - Japan
- Parry Sugars Refinery, India
- Kaltim Prima Coal - Indonesia
- Straits Asia Resources Limited - Singapore
- Madhucon Powers Ltd - India
- Borneo Indobara - Indonesia
- GMR Energy Limited - India
- VISA Power Limited - India
- Kobexindo Tractors - Indoneisa
- European Bulk Services B.V. - Netherlands
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Petrochimia International Co. Ltd.- Taiwan
- Orica Australia Pty. Ltd.
- Grasim Industreis Ltd - India
- CIMB Investment Bank - Malaysia
- SMG Consultants - Indonesia
- White Energy Company Limited
- GAC Shipping (India) Pvt Ltd
- Bangladesh Power Developement Board
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