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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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Wednesday, 16 July 14
WEEKLY SHIPPING MARKET INSIGHT - INTERMODAL
Wake me up when September ends - Theodore Ntalakos
Since last September most thought that the worst was behind us. It looks like the market de ...
Tuesday, 15 July 14
INDONESIA'S TOTAL COAL PRODUCTION REACHED ANOTHER HIGH DURING THE FIRST SIX MONTHS; GOVERNMENT EXPECTED TO RAISE ROYALTIES
COALspot.com: Indonesia's total coal production reached 213 million tons during January through June, up by 7.6 percent y-o-y. Coal output in I ...
Monday, 14 July 14
THE END OF THE ERA OF HEAVY FUEL OIL IN MARITIME SHIPPING - ICCT
KNOWLEDGE TO ELEVATE
Since the 1960s, heavy fuel oil (HFO) has been the king of marine fuels. Viscous, dirty, yet inexpensive and widely avail ...
Monday, 14 July 14
SGX SUB-BIT FOB INDONESIA COAL SWAP FOR Q4' 14 DELIVERY CLOSED AT $ 54.80
COALspot.com: Indonesian coal swaps for average Q3’ 2014 lost on day, week and on month according to AsiaClear OTC coal swap's reports re ...
Monday, 14 July 14
SGX CFR SOUTH CHINA COAL SWAP FOR Q3' 14 LOST 17.29% SINCE EARLY JANUARY 2014
COALspot.com: Coal price falling is continues as the impact oversupply and lower demand. API 8 CFR South China Coal swap for delivery in Q3 drops U ...
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- Miang Besar Coal Terminal - Indonesia
- Parliament of New Zealand
- Lanco Infratech Ltd - India
- Chamber of Mines of South Africa
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Energy Link Ltd, New Zealand
- Ambuja Cements Ltd - India
- Indian Oil Corporation Limited
- Formosa Plastics Group - Taiwan
- Bangladesh Power Developement Board
- Gujarat Sidhee Cement - India
- Aditya Birla Group - India
- Videocon Industries ltd - India
- Aboitiz Power Corporation - Philippines
- Interocean Group of Companies - India
- Straits Asia Resources Limited - Singapore
- Dalmia Cement Bharat India
- Mercuria Energy - Indonesia
- Wilmar Investment Holdings
- Karbindo Abesyapradhi - Indoneisa
- Renaissance Capital - South Africa
- Georgia Ports Authority, United States
- Attock Cement Pakistan Limited
- Pipit Mutiara Jaya. PT, Indonesia
- SMC Global Power, Philippines
- Gujarat Electricity Regulatory Commission - India
- Directorate Of Revenue Intelligence - India
- Essar Steel Hazira Ltd - India
- Orica Australia Pty. Ltd.
- Indika Energy - Indonesia
- Kartika Selabumi Mining - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- IEA Clean Coal Centre - UK
- Africa Commodities Group - South Africa
- VISA Power Limited - India
- New Zealand Coal & Carbon
- Oldendorff Carriers - Singapore
- Price Waterhouse Coopers - Russia
- SN Aboitiz Power Inc, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Grasim Industreis Ltd - India
- Global Coal Blending Company Limited - Australia
- Bhushan Steel Limited - India
- ICICI Bank Limited - India
- Sarangani Energy Corporation, Philippines
- Wood Mackenzie - Singapore
- Star Paper Mills Limited - India
- Bulk Trading Sa - Switzerland
- Indonesian Coal Mining Association
- ASAPP Information Group - India
- Xindia Steels Limited - India
- Siam City Cement - Thailand
- Marubeni Corporation - India
- India Bulls Power Limited - India
- Timah Investasi Mineral - Indoneisa
- Bhatia International Limited - India
- Intertek Mineral Services - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Rio Tinto Coal - Australia
- Port Waratah Coal Services - Australia
- Gujarat Mineral Development Corp Ltd - India
- Riau Bara Harum - Indonesia
- Thiess Contractors Indonesia
- Sojitz Corporation - Japan
- TNB Fuel Sdn Bhd - Malaysia
- Sindya Power Generating Company Private Ltd
- Planning Commission, India
- Jindal Steel & Power Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Makarim & Taira - Indonesia
- Orica Mining Services - Indonesia
- Deloitte Consulting - India
- Mintek Dendrill Indonesia
- Trasteel International SA, Italy
- Neyveli Lignite Corporation Ltd, - India
- Eastern Energy - Thailand
- Latin American Coal - Colombia
- Larsen & Toubro Limited - India
- Sree Jayajothi Cements Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Metalloyd Limited - United Kingdom
- Kobexindo Tractors - Indoneisa
- Kapuas Tunggal Persada - Indonesia
- Bhoruka Overseas - Indonesia
- Semirara Mining and Power Corporation, Philippines
- CIMB Investment Bank - Malaysia
- Holcim Trading Pte Ltd - Singapore
- Meralco Power Generation, Philippines
- Bukit Baiduri Energy - Indonesia
- London Commodity Brokers - England
- Petron Corporation, Philippines
- Central Java Power - Indonesia
- Minerals Council of Australia
- Altura Mining Limited, Indonesia
- Coastal Gujarat Power Limited - India
- Coal and Oil Company - UAE
- Karaikal Port Pvt Ltd - India
- Economic Council, Georgia
- International Coal Ventures Pvt Ltd - India
- Romanian Commodities Exchange
- Commonwealth Bank - Australia
- Kohat Cement Company Ltd. - Pakistan
- Edison Trading Spa - Italy
- Global Green Power PLC Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Samtan Co., Ltd - South Korea
- Mjunction Services Limited - India
- Agrawal Coal Company - India
- Binh Thuan Hamico - Vietnam
- Vizag Seaport Private Limited - India
- Posco Energy - South Korea
- White Energy Company Limited
- Antam Resourcindo - Indonesia
- Independent Power Producers Association of India
- GMR Energy Limited - India
- Ministry of Finance - Indonesia
- South Luzon Thermal Energy Corporation
- TeaM Sual Corporation - Philippines
- MS Steel International - UAE
- Uttam Galva Steels Limited - India
- Meenaskhi Energy Private Limited - India
- Chettinad Cement Corporation Ltd - India
- Savvy Resources Ltd - HongKong
- Cement Manufacturers Association - India
- Kalimantan Lumbung Energi - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Madhucon Powers Ltd - India
- PowerSource Philippines DevCo
- Jorong Barutama Greston.PT - Indonesia
- Parry Sugars Refinery, India
- Indian Energy Exchange, India
- IHS Mccloskey Coal Group - USA
- Bharathi Cement Corporation - India
- Standard Chartered Bank - UAE
- Australian Coal Association
- Alfred C Toepfer International GmbH - Germany
- The University of Queensland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Simpson Spence & Young - Indonesia
- Kepco SPC Power Corporation, Philippines
- SMG Consultants - Indonesia
- The Treasury - Australian Government
- Sinarmas Energy and Mining - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- European Bulk Services B.V. - Netherlands
- Kumho Petrochemical, South Korea
- Rashtriya Ispat Nigam Limited - India
- GVK Power & Infra Limited - India
- OPG Power Generation Pvt Ltd - India
- Krishnapatnam Port Company Ltd. - India
- AsiaOL BioFuels Corp., Philippines
- Bayan Resources Tbk. - Indonesia
- Global Business Power Corporation, Philippines
- Vedanta Resources Plc - India
- Medco Energi Mining Internasional
- Semirara Mining Corp, Philippines
- Leighton Contractors Pty Ltd - Australia
- Coalindo Energy - Indonesia
- Indogreen Group - Indonesia
- Toyota Tsusho Corporation, Japan
- Tata Chemicals Ltd - India
- LBH Netherlands Bv - Netherlands
- Malabar Cements Ltd - India
- Eastern Coal Council - USA
- Manunggal Multi Energi - Indonesia
- McConnell Dowell - Australia
- The State Trading Corporation of India Ltd
- Carbofer General Trading SA - India
- Siam City Cement PLC, Thailand
- Pendopo Energi Batubara - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- PNOC Exploration Corporation - Philippines
- Energy Development Corp, Philippines
- Cigading International Bulk Terminal - Indonesia
- GAC Shipping (India) Pvt Ltd
- Kaltim Prima Coal - Indonesia
- Iligan Light & Power Inc, Philippines
- Jaiprakash Power Ventures ltd
- Electricity Authority, New Zealand
- San Jose City I Power Corp, Philippines
- Ind-Barath Power Infra Limited - India
- Therma Luzon, Inc, Philippines
- Ministry of Mines - Canada
- Australian Commodity Traders Exchange
- PTC India Limited - India
- Goldman Sachs - Singapore
- Offshore Bulk Terminal Pte Ltd, Singapore
- Merrill Lynch Commodities Europe
- CNBM International Corporation - China
- Mercator Lines Limited - India
- Sical Logistics Limited - India
- Heidelberg Cement - Germany
- Bukit Makmur.PT - Indonesia
- Power Finance Corporation Ltd., India
- Salva Resources Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Thai Mozambique Logistica
- Barasentosa Lestari - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Tamil Nadu electricity Board
- Kideco Jaya Agung - Indonesia
- Baramulti Group, Indonesia
- Banpu Public Company Limited - Thailand
- Electricity Generating Authority of Thailand
- Anglo American - United Kingdom
- Bukit Asam (Persero) Tbk - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Vijayanagar Sugar Pvt Ltd - India
- Globalindo Alam Lestari - Indonesia
- Central Electricity Authority - India
- Sakthi Sugars Limited - India
- Maheswari Brothers Coal Limited - India
- Borneo Indobara - Indonesia
- Indo Tambangraya Megah - Indonesia
- Singapore Mercantile Exchange
- Ministry of Transport, Egypt
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