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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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Thursday, 24 July 14
INDONESIA'S JUNE 2014 COAL EXPORT VOLUME DOWN 6.82%; AVERAGE SELLING PRICE DOWN
COALspot.com: Indonesia, one of the world's largest coal producer and the global leading multi grade coal exporter shipped around $1.70* ...
Thursday, 24 July 14
HANDY: SOUTH AFRICA SOFTENED A BIT, HERE RATES ARE AT AROUND 8K +150K BB FOR TRIPS EAST - FEARNLEYS AS
Handy
The handy market in the Atlantic is going sideways and a tick down on low activity. Levels hoovering around USD 5k on Supras. The SMX marke ...
Thursday, 24 July 14
INDONESIAN COAL EXPORTERS ARE REQUIRED TO OBTAIN ET-BATUBARA UNDER LATEST TRADE MINISTRY'S NEW REGULATION
COALspot.com: Indonesia's trade ministry has issued regulation No. 39/M-DAG/PER/7/2014 which is requires exporters of power plant coal as ...
Wednesday, 23 July 14
PANAMAXES WERE BACK ON A DOWNWARD COURSE; CAPES WERE FEELING THE MOST PRESSURE - INTERMODAL
COALspot.com: The Dry Bulk market was on a downward spiral this week, with the BDI noting another week-on-week decline of the magnitude of 10% this ...
Wednesday, 23 July 14
WEEKLY SHIPPING MARKET INSIGHT - INTERMODAL
In Australia, the world’s largest mining group, BHP Billiton, will beat the iron ore export target of more than 220 million tonnes for 2014. ...
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- Ministry of Finance - Indonesia
- Posco Energy - South Korea
- Sinarmas Energy and Mining - Indonesia
- Bukit Baiduri Energy - Indonesia
- Independent Power Producers Association of India
- Globalindo Alam Lestari - Indonesia
- Kapuas Tunggal Persada - Indonesia
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- Mjunction Services Limited - India
- Wilmar Investment Holdings
- Orica Australia Pty. Ltd.
- White Energy Company Limited
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- Samtan Co., Ltd - South Korea
- Power Finance Corporation Ltd., India
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- Siam City Cement - Thailand
- Singapore Mercantile Exchange
- Ministry of Mines - Canada
- Parry Sugars Refinery, India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Karbindo Abesyapradhi - Indoneisa
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- Directorate Of Revenue Intelligence - India
- Bukit Asam (Persero) Tbk - Indonesia
- Grasim Industreis Ltd - India
- Toyota Tsusho Corporation, Japan
- Dalmia Cement Bharat India
- Ind-Barath Power Infra Limited - India
- Goldman Sachs - Singapore
- Straits Asia Resources Limited - Singapore
- Directorate General of MIneral and Coal - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Riau Bara Harum - Indonesia
- Sree Jayajothi Cements Limited - India
- Jindal Steel & Power Ltd - India
- Borneo Indobara - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- PowerSource Philippines DevCo
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- MS Steel International - UAE
- Tata Chemicals Ltd - India
- Chamber of Mines of South Africa
- Karaikal Port Pvt Ltd - India
- Kobexindo Tractors - Indoneisa
- London Commodity Brokers - England
- Vedanta Resources Plc - India
- Energy Link Ltd, New Zealand
- Star Paper Mills Limited - India
- Larsen & Toubro Limited - India
- Central Java Power - Indonesia
- CNBM International Corporation - China
- Lanco Infratech Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Parliament of New Zealand
- Simpson Spence & Young - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Formosa Plastics Group - Taiwan
- Billiton Holdings Pty Ltd - Australia
- Commonwealth Bank - Australia
- Kaltim Prima Coal - Indonesia
- TeaM Sual Corporation - Philippines
- Meralco Power Generation, Philippines
- Barasentosa Lestari - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Cement Manufacturers Association - India
- Orica Mining Services - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Indian Energy Exchange, India
- The University of Queensland
- SMG Consultants - Indonesia
- Economic Council, Georgia
- Australian Coal Association
- Bhushan Steel Limited - India
- Africa Commodities Group - South Africa
- Iligan Light & Power Inc, Philippines
- Metalloyd Limited - United Kingdom
- Standard Chartered Bank - UAE
- GMR Energy Limited - India
- Timah Investasi Mineral - Indoneisa
- Agrawal Coal Company - India
- GAC Shipping (India) Pvt Ltd
- Coastal Gujarat Power Limited - India
- South Luzon Thermal Energy Corporation
- Krishnapatnam Port Company Ltd. - India
- Oldendorff Carriers - Singapore
- Heidelberg Cement - Germany
- Binh Thuan Hamico - Vietnam
- Indo Tambangraya Megah - Indonesia
- Manunggal Multi Energi - Indonesia
- ICICI Bank Limited - India
- Xindia Steels Limited - India
- OPG Power Generation Pvt Ltd - India
- Essar Steel Hazira Ltd - India
- PTC India Limited - India
- San Jose City I Power Corp, Philippines
- Attock Cement Pakistan Limited
- Coalindo Energy - Indonesia
- Global Business Power Corporation, Philippines
- Aboitiz Power Corporation - Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Savvy Resources Ltd - HongKong
- Carbofer General Trading SA - India
- Indonesian Coal Mining Association
- LBH Netherlands Bv - Netherlands
- Kepco SPC Power Corporation, Philippines
- Videocon Industries ltd - India
- Antam Resourcindo - Indonesia
- Petron Corporation, Philippines
- Edison Trading Spa - Italy
- Tamil Nadu electricity Board
- Global Green Power PLC Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Anglo American - United Kingdom
- Sarangani Energy Corporation, Philippines
- Uttam Galva Steels Limited - India
- India Bulls Power Limited - India
- Altura Mining Limited, Indonesia
- Renaissance Capital - South Africa
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Malabar Cements Ltd - India
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Romanian Commodities Exchange
- Marubeni Corporation - India
- Banpu Public Company Limited - Thailand
- Thiess Contractors Indonesia
- Global Coal Blending Company Limited - Australia
- Ceylon Electricity Board - Sri Lanka
- Merrill Lynch Commodities Europe
- PetroVietnam Power Coal Import and Supply Company
- Central Electricity Authority - India
- Baramulti Group, Indonesia
- Gujarat Sidhee Cement - India
- Planning Commission, India
- Australian Commodity Traders Exchange
- Trasteel International SA, Italy
- Port Waratah Coal Services - Australia
- European Bulk Services B.V. - Netherlands
- Sical Logistics Limited - India
- Kartika Selabumi Mining - Indonesia
- Miang Besar Coal Terminal - Indonesia
- SMC Global Power, Philippines
- Bulk Trading Sa - Switzerland
- IHS Mccloskey Coal Group - USA
- McConnell Dowell - Australia
- Jaiprakash Power Ventures ltd
- Bhatia International Limited - India
- Electricity Generating Authority of Thailand
- Gujarat Electricity Regulatory Commission - India
- Semirara Mining Corp, Philippines
- Sakthi Sugars Limited - India
- Medco Energi Mining Internasional
- Offshore Bulk Terminal Pte Ltd, Singapore
- Vizag Seaport Private Limited - India
- Leighton Contractors Pty Ltd - Australia
- Indika Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- SN Aboitiz Power Inc, Philippines
- Indogreen Group - Indonesia
- Energy Development Corp, Philippines
- Deloitte Consulting - India
- Aditya Birla Group - India
- Eastern Energy - Thailand
- Ministry of Transport, Egypt
- Meenaskhi Energy Private Limited - India
- Interocean Group of Companies - India
- Mercator Lines Limited - India
- Mercuria Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Eastern Coal Council - USA
- Maharashtra Electricity Regulatory Commission - India
- Bharathi Cement Corporation - India
- Latin American Coal - Colombia
- PNOC Exploration Corporation - Philippines
- Semirara Mining and Power Corporation, Philippines
- Alfred C Toepfer International GmbH - Germany
- Minerals Council of Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Madhucon Powers Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- The Treasury - Australian Government
- VISA Power Limited - India
- CIMB Investment Bank - Malaysia
- International Coal Ventures Pvt Ltd - India
- ASAPP Information Group - India
- Intertek Mineral Services - Indonesia
- Sojitz Corporation - Japan
- Salva Resources Pvt Ltd - India
- Ambuja Cements Ltd - India
- Price Waterhouse Coopers - Russia
- The State Trading Corporation of India Ltd
- IEA Clean Coal Centre - UK
- Chettinad Cement Corporation Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Wood Mackenzie - Singapore
- Georgia Ports Authority, United States
- New Zealand Coal & Carbon
- GVK Power & Infra Limited - India
- Mintek Dendrill Indonesia
- Electricity Authority, New Zealand
- Thai Mozambique Logistica
- Maheswari Brothers Coal Limited - India
- Therma Luzon, Inc, Philippines
- Indian Oil Corporation Limited
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