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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, 25 June 14
INDONESIAN COAL EXPORTS ON RISE; EARNINGS FALL ON LOWER SELLING PRICES
COALspot.com: Indonesia, one of the world's largest coal producer and the global largest multi grade coal exporter shipped around $1.84* ...
Wednesday, 25 June 14
THE PANAMAX MARKET REACHED FRESH LOWS FOR THE YEAR, SAYS INTERMODAL
COALspot.com: The Dry Bulk market closed off the week noting a slight decrease, but this image of stability is merely representative of freight rat ...
Wednesday, 25 June 14
SHIPPING: MARKET INSIGHT - YANNIS OLZIERSKY
During his recent visit in London, China's Premier, Li Keqiang, announced that China's economy, the world's second largest after the US ...
Tuesday, 24 June 14
INDONESIAN COAL MINER TARGETS RP 313 BILLION IPO
COALspot.com: Indonesian coal miner PT Mitrabara Adiperdana is aiming to raise up to Rp 313 billion to Rp 368 billion (approximately $26.133 millio ...
Monday, 23 June 14
INDONESIAN COAL SWAP FOR Q3 DELIVERY LOST 8.60% Y-O-Y;4.80% M-O-M
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 ...
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- AsiaOL BioFuels Corp., Philippines
- Neyveli Lignite Corporation Ltd, - India
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- Directorate General of MIneral and Coal - Indonesia
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- Eastern Coal Council - USA
- Petron Corporation, Philippines
- Bhatia International Limited - India
- Kartika Selabumi Mining - Indonesia
- Rio Tinto Coal - Australia
- London Commodity Brokers - England
- Jorong Barutama Greston.PT - Indonesia
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- Thiess Contractors Indonesia
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- PowerSource Philippines DevCo
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- The University of Queensland
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- Sarangani Energy Corporation, Philippines
- Orica Australia Pty. Ltd.
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- Eastern Energy - Thailand
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- Malabar Cements Ltd - India
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- Wood Mackenzie - Singapore
- Kideco Jaya Agung - Indonesia
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- Carbofer General Trading SA - India
- Mjunction Services Limited - India
- Ministry of Mines - Canada
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- Attock Cement Pakistan Limited
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- Australian Coal Association
- Iligan Light & Power Inc, Philippines
- Samtan Co., Ltd - South Korea
- SMG Consultants - Indonesia
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- Ministry of Transport, Egypt
- Orica Mining Services - Indonesia
- Bhoruka Overseas - Indonesia
- PTC India Limited - India
- Merrill Lynch Commodities Europe
- Sakthi Sugars Limited - India
- CIMB Investment Bank - Malaysia
- Bukit Baiduri Energy - Indonesia
- Trasteel International SA, Italy
- Binh Thuan Hamico - Vietnam
- Central Electricity Authority - India
- Coal and Oil Company - UAE
- IHS Mccloskey Coal Group - USA
- Straits Asia Resources Limited - Singapore
- Chettinad Cement Corporation Ltd - India
- GAC Shipping (India) Pvt Ltd
- Barasentosa Lestari - Indonesia
- Salva Resources Pvt Ltd - India
- Anglo American - United Kingdom
- Maheswari Brothers Coal Limited - India
- Globalindo Alam Lestari - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sojitz Corporation - Japan
- Madhucon Powers Ltd - India
- Therma Luzon, Inc, Philippines
- European Bulk Services B.V. - Netherlands
- Indian Oil Corporation Limited
- India Bulls Power Limited - India
- Power Finance Corporation Ltd., India
- Global Business Power Corporation, Philippines
- Indonesian Coal Mining Association
- Larsen & Toubro Limited - India
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- Grasim Industreis Ltd - India
- Central Java Power - Indonesia
- SN Aboitiz Power Inc, Philippines
- Essar Steel Hazira Ltd - India
- Tata Chemicals Ltd - India
- LBH Netherlands Bv - Netherlands
- PetroVietnam Power Coal Import and Supply Company
- Bharathi Cement Corporation - India
- The Treasury - Australian Government
- GMR Energy Limited - India
- Uttam Galva Steels Limited - India
- Ministry of Finance - Indonesia
- Indian Energy Exchange, India
- Independent Power Producers Association of India
- Savvy Resources Ltd - HongKong
- Commonwealth Bank - Australia
- VISA Power Limited - India
- Ind-Barath Power Infra Limited - India
- Thai Mozambique Logistica
- Wilmar Investment Holdings
- Kohat Cement Company Ltd. - Pakistan
- GVK Power & Infra Limited - India
- Antam Resourcindo - Indonesia
- Meralco Power Generation, Philippines
- Posco Energy - South Korea
- Electricity Generating Authority of Thailand
- Parry Sugars Refinery, India
- Australian Commodity Traders Exchange
- Bangladesh Power Developement Board
- Kepco SPC Power Corporation, Philippines
- Holcim Trading Pte Ltd - Singapore
- Siam City Cement - Thailand
- McConnell Dowell - Australia
- The State Trading Corporation of India Ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bank of Tokyo Mitsubishi UFJ Ltd
- Semirara Mining and Power Corporation, Philippines
- Edison Trading Spa - Italy
- International Coal Ventures Pvt Ltd - India
- Riau Bara Harum - Indonesia
- Energy Link Ltd, New Zealand
- Banpu Public Company Limited - Thailand
- Pendopo Energi Batubara - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Port Waratah Coal Services - Australia
- White Energy Company Limited
- Ambuja Cements Ltd - India
- Global Green Power PLC Corporation, Philippines
- Planning Commission, India
- Interocean Group of Companies - India
- Energy Development Corp, Philippines
- Chamber of Mines of South Africa
- Global Coal Blending Company Limited - Australia
- Intertek Mineral Services - Indonesia
- Vizag Seaport Private Limited - India
- Formosa Plastics Group - Taiwan
- Dalmia Cement Bharat India
- Star Paper Mills Limited - India
- Vedanta Resources Plc - India
- Simpson Spence & Young - Indonesia
- Sical Logistics Limited - India
- Latin American Coal - Colombia
- Kumho Petrochemical, South Korea
- Indika Energy - Indonesia
- Cement Manufacturers Association - India
- PNOC Exploration Corporation - Philippines
- Deloitte Consulting - India
- MS Steel International - UAE
- ICICI Bank Limited - India
- Metalloyd Limited - United Kingdom
- Singapore Mercantile Exchange
- Maharashtra Electricity Regulatory Commission - India
- Billiton Holdings Pty Ltd - Australia
- Xindia Steels Limited - India
- Bukit Makmur.PT - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- GN Power Mariveles Coal Plant, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Jindal Steel & Power Ltd - India
- New Zealand Coal & Carbon
- Medco Energi Mining Internasional
- Karbindo Abesyapradhi - Indoneisa
- Mintek Dendrill Indonesia
- San Jose City I Power Corp, Philippines
- Mercuria Energy - Indonesia
- Price Waterhouse Coopers - Russia
- Altura Mining Limited, Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Aditya Birla Group - India
- Directorate Of Revenue Intelligence - India
- Baramulti Group, Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Lanco Infratech Ltd - India
- Makarim & Taira - Indonesia
- Coastal Gujarat Power Limited - India
- OPG Power Generation Pvt Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Semirara Mining Corp, Philippines
- Gujarat Sidhee Cement - India
- Kaltim Prima Coal - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Leighton Contractors Pty Ltd - Australia
- Videocon Industries ltd - India
- Renaissance Capital - South Africa
- Asmin Koalindo Tuhup - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Vijayanagar Sugar Pvt Ltd - India
- Sree Jayajothi Cements Limited - India
- Goldman Sachs - Singapore
- ASAPP Information Group - India
- Parliament of New Zealand
- Heidelberg Cement - Germany
- Marubeni Corporation - India
- Bayan Resources Tbk. - Indonesia
- Coalindo Energy - Indonesia
- Romanian Commodities Exchange
- Electricity Authority, New Zealand
- Standard Chartered Bank - UAE
- Minerals Council of Australia
- Jaiprakash Power Ventures ltd
- Toyota Tsusho Corporation, Japan
- South Luzon Thermal Energy Corporation
- Miang Besar Coal Terminal - Indonesia
- Economic Council, Georgia
- Siam City Cement PLC, Thailand
- IEA Clean Coal Centre - UK
- Agrawal Coal Company - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Indo Tambangraya Megah - Indonesia
- Bhushan Steel Limited - India
- Oldendorff Carriers - Singapore
- Bulk Trading Sa - Switzerland
- Krishnapatnam Port Company Ltd. - India
- Borneo Indobara - Indonesia
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