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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, 10 July 14
SGX EXPANDS ACROSS THE BULKS WITH NEW COAL PRODUCTS
COALspot.com: Singapore Exchange (SGX) is expanding its bulk commodity derivatives offering by launching new coking and thermal coal products on 4 ...
Thursday, 10 July 14
HANDY: SMALL INCREASE; PANAMAX: POSITIVE TONE; CAPESIZE: PAPER VALUES REMAIN WEEK
Handy
It is a general increase in activity in both hemispheres whereas rates have just experienced a small increase. In the Feast we see stable a ...
Wednesday, 09 July 14
SHIP INVESTMENTS ARE TRENDING LOWER
Most ship owners are deeming current ship prices on the high side, refraining from making serious commitments in new acquisitions or newbuilding or ...
Wednesday, 09 July 14
INDIAN GOVERNMENT ADVISED POWER UTILITIES TO INCREASE COAL IMPORTS
COALspot.com: The government of India has advised power utilities to increase coal imports to meet fuel shortages and those that have fuel supply p ...
Wednesday, 09 July 14
PANAMAX MARKET FINALLY CORRECTING UPWARDS; AVERAGE TC MORE THAN DOUBLING WEEK ON WEEK - INTERMODAL
The Dry Bulk market has closed off on Friday on a more positive note, with most segments noting weekly gains and the Panamax market finally correct ...
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- Eastern Energy - Thailand
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- Jaiprakash Power Ventures ltd
- Bulk Trading Sa - Switzerland
- Gujarat Mineral Development Corp Ltd - India
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- Makarim & Taira - Indonesia
- Kobexindo Tractors - Indoneisa
- Coalindo Energy - Indonesia
- Grasim Industreis Ltd - India
- GMR Energy Limited - India
- Binh Thuan Hamico - Vietnam
- Chettinad Cement Corporation Ltd - India
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- Goldman Sachs - Singapore
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- Neyveli Lignite Corporation Ltd, - India
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- Pipit Mutiara Jaya. PT, Indonesia
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- Ministry of Mines - Canada
- Trasteel International SA, Italy
- Sojitz Corporation - Japan
- Intertek Mineral Services - Indonesia
- Manunggal Multi Energi - Indonesia
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- Sical Logistics Limited - India
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- European Bulk Services B.V. - Netherlands
- Power Finance Corporation Ltd., India
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- Therma Luzon, Inc, Philippines
- Kumho Petrochemical, South Korea
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- Energy Link Ltd, New Zealand
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- Pendopo Energi Batubara - Indonesia
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- Aboitiz Power Corporation - Philippines
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- Truba Alam Manunggal Engineering.Tbk - Indonesia
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- Cement Manufacturers Association - India
- Ministry of Finance - Indonesia
- Thiess Contractors Indonesia
- Medco Energi Mining Internasional
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- Ministry of Transport, Egypt
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- IEA Clean Coal Centre - UK
- SN Aboitiz Power Inc, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Antam Resourcindo - Indonesia
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- Asmin Koalindo Tuhup - Indonesia
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- Orica Mining Services - Indonesia
- Edison Trading Spa - Italy
- Merrill Lynch Commodities Europe
- Holcim Trading Pte Ltd - Singapore
- The State Trading Corporation of India Ltd
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- Australian Coal Association
- Bharathi Cement Corporation - India
- McConnell Dowell - Australia
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- PTC India Limited - India
- Energy Development Corp, Philippines
- Electricity Authority, New Zealand
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- Indogreen Group - Indonesia
- Salva Resources Pvt Ltd - India
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- Posco Energy - South Korea
- Simpson Spence & Young - Indonesia
- Coal and Oil Company - UAE
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- Kartika Selabumi Mining - Indonesia
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- Rio Tinto Coal - Australia
- GAC Shipping (India) Pvt Ltd
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- Chamber of Mines of South Africa
- The Treasury - Australian Government
- Gujarat Electricity Regulatory Commission - India
- IHS Mccloskey Coal Group - USA
- Indo Tambangraya Megah - Indonesia
- New Zealand Coal & Carbon
- London Commodity Brokers - England
- OPG Power Generation Pvt Ltd - India
- Metalloyd Limited - United Kingdom
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- Malabar Cements Ltd - India
- Vedanta Resources Plc - India
- Bayan Resources Tbk. - Indonesia
- Economic Council, Georgia
- ASAPP Information Group - India
- Eastern Coal Council - USA
- Banpu Public Company Limited - Thailand
- Kaltim Prima Coal - Indonesia
- Bukit Makmur.PT - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Sakthi Sugars Limited - India
- SMG Consultants - Indonesia
- Directorate Of Revenue Intelligence - India
- Savvy Resources Ltd - HongKong
- PNOC Exploration Corporation - Philippines
- Global Coal Blending Company Limited - Australia
- Miang Besar Coal Terminal - Indonesia
- Bhoruka Overseas - Indonesia
- Parliament of New Zealand
- White Energy Company Limited
- Wood Mackenzie - Singapore
- Toyota Tsusho Corporation, Japan
- SMC Global Power, Philippines
- Minerals Council of Australia
- Directorate General of MIneral and Coal - Indonesia
- The University of Queensland
- Alfred C Toepfer International GmbH - Germany
- Singapore Mercantile Exchange
- Indian Oil Corporation Limited
- Straits Asia Resources Limited - Singapore
- Madhucon Powers Ltd - India
- Gujarat Sidhee Cement - India
- Sree Jayajothi Cements Limited - India
- Formosa Plastics Group - Taiwan
- Mintek Dendrill Indonesia
- Planning Commission, India
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