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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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Friday, 23 May 14
DRY BULK NEWBUILDING CANCELLATIONS COULD HELP SUPPORT MARKET IN THE COMING WEEKS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The dry bulk market's demise over the past few months maybe has come as a surprise to many, but analysts and shipbrokers are looking forward to ...
Thursday, 22 May 14
HEAR SUCCESSFUL CASE STUDIES FROM 10 INDEPENDENT UNCONVENTIONAL GAS OPERATORS
Unconventional Gas Asia 2014 will provide a unique opportunity for Asia’s unconventional gas leaders to share their experience and expertise ...
Thursday, 22 May 14
CNPC-GAZPROM DEAL A MEDIUM - TERM POSITIVE FOR CHINA'S GAS SECTOR
Fitch Ratings says a 30-year deal in which Russia's OAO Gazprom (BBB/Negative) will supply gas to China National Petroleum Corporation (CNPC; A ...
Thursday, 22 May 14
CAPESIZE : RATES ARE STILL UNDER PRESSURE
Handy
A quiet start into the week in Far East, some fresh Indonesian coal order in the market. For trips within S.E. Asia, Supras are trading aro ...
Wednesday, 21 May 14
SHIPPING: MARKET INSIGHT - GEORGE LAZARIDIS
The recent revision by the OECD of its global growth forecast has sparked a debate as to the potential outcome these new figures will have on seabo ...
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- Deloitte Consulting - India
- Alfred C Toepfer International GmbH - Germany
- Africa Commodities Group - South Africa
- Formosa Plastics Group - Taiwan
- TeaM Sual Corporation - Philippines
- European Bulk Services B.V. - Netherlands
- Coalindo Energy - Indonesia
- ASAPP Information Group - India
- Energy Development Corp, Philippines
- Bayan Resources Tbk. - Indonesia
- Samtan Co., Ltd - South Korea
- GAC Shipping (India) Pvt Ltd
- Indonesian Coal Mining Association
- Straits Asia Resources Limited - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Sical Logistics Limited - India
- South Luzon Thermal Energy Corporation
- Eastern Energy - Thailand
- Standard Chartered Bank - UAE
- Thiess Contractors Indonesia
- Central Java Power - Indonesia
- Mjunction Services Limited - India
- Bangladesh Power Developement Board
- Tata Chemicals Ltd - India
- Bhushan Steel Limited - India
- Bharathi Cement Corporation - India
- Vedanta Resources Plc - India
- Cement Manufacturers Association - India
- TNB Fuel Sdn Bhd - Malaysia
- Mercator Lines Limited - India
- Makarim & Taira - Indonesia
- IHS Mccloskey Coal Group - USA
- CIMB Investment Bank - Malaysia
- Bhoruka Overseas - Indonesia
- Uttam Galva Steels Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Videocon Industries ltd - India
- Wood Mackenzie - Singapore
- Heidelberg Cement - Germany
- Vijayanagar Sugar Pvt Ltd - India
- Carbofer General Trading SA - India
- Banpu Public Company Limited - Thailand
- Directorate General of MIneral and Coal - Indonesia
- Ministry of Finance - Indonesia
- The State Trading Corporation of India Ltd
- San Jose City I Power Corp, Philippines
- Neyveli Lignite Corporation Ltd, - India
- SMG Consultants - Indonesia
- Semirara Mining Corp, Philippines
- Siam City Cement PLC, Thailand
- Intertek Mineral Services - Indonesia
- Grasim Industreis Ltd - India
- Thai Mozambique Logistica
- PetroVietnam Power Coal Import and Supply Company
- Indogreen Group - Indonesia
- Star Paper Mills Limited - India
- Posco Energy - South Korea
- Semirara Mining and Power Corporation, Philippines
- Global Coal Blending Company Limited - Australia
- Wilmar Investment Holdings
- Sinarmas Energy and Mining - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indo Tambangraya Megah - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Chamber of Mines of South Africa
- The Treasury - Australian Government
- Eastern Coal Council - USA
- Malabar Cements Ltd - India
- Barasentosa Lestari - Indonesia
- Parry Sugars Refinery, India
- Metalloyd Limited - United Kingdom
- Jaiprakash Power Ventures ltd
- Therma Luzon, Inc, Philippines
- Ministry of Mines - Canada
- Agrawal Coal Company - India
- Kaltim Prima Coal - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Planning Commission, India
- Globalindo Alam Lestari - Indonesia
- Billiton Holdings Pty Ltd - Australia
- McConnell Dowell - Australia
- Energy Link Ltd, New Zealand
- Bukit Asam (Persero) Tbk - Indonesia
- Larsen & Toubro Limited - India
- Sakthi Sugars Limited - India
- Iligan Light & Power Inc, Philippines
- Anglo American - United Kingdom
- Mintek Dendrill Indonesia
- Marubeni Corporation - India
- The University of Queensland
- Global Green Power PLC Corporation, Philippines
- Ind-Barath Power Infra Limited - India
- Rashtriya Ispat Nigam Limited - India
- Aboitiz Power Corporation - Philippines
- Borneo Indobara - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Kideco Jaya Agung - Indonesia
- Global Business Power Corporation, Philippines
- GVK Power & Infra Limited - India
- Bulk Trading Sa - Switzerland
- Lanco Infratech Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Electricity Generating Authority of Thailand
- Edison Trading Spa - Italy
- Maheswari Brothers Coal Limited - India
- VISA Power Limited - India
- Simpson Spence & Young - Indonesia
- Savvy Resources Ltd - HongKong
- Indika Energy - Indonesia
- IEA Clean Coal Centre - UK
- Karaikal Port Pvt Ltd - India
- LBH Netherlands Bv - Netherlands
- Bukit Makmur.PT - Indonesia
- Oldendorff Carriers - Singapore
- Essar Steel Hazira Ltd - India
- Economic Council, Georgia
- Orica Australia Pty. Ltd.
- Merrill Lynch Commodities Europe
- White Energy Company Limited
- AsiaOL BioFuels Corp., Philippines
- Orica Mining Services - Indonesia
- SN Aboitiz Power Inc, Philippines
- Price Waterhouse Coopers - Russia
- Bank of Tokyo Mitsubishi UFJ Ltd
- CNBM International Corporation - China
- Madhucon Powers Ltd - India
- Pendopo Energi Batubara - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Bahari Cakrawala Sebuku - Indonesia
- Mercuria Energy - Indonesia
- Australian Coal Association
- Sindya Power Generating Company Private Ltd
- Directorate Of Revenue Intelligence - India
- India Bulls Power Limited - India
- MS Steel International - UAE
- Jindal Steel & Power Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Latin American Coal - Colombia
- Trasteel International SA, Italy
- Chettinad Cement Corporation Ltd - India
- Siam City Cement - Thailand
- Kalimantan Lumbung Energi - Indonesia
- Power Finance Corporation Ltd., India
- Indian Energy Exchange, India
- PNOC Exploration Corporation - Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- SMC Global Power, Philippines
- Georgia Ports Authority, United States
- Coal and Oil Company - UAE
- Attock Cement Pakistan Limited
- Tamil Nadu electricity Board
- Goldman Sachs - Singapore
- Petrochimia International Co. Ltd.- Taiwan
- London Commodity Brokers - England
- Petron Corporation, Philippines
- Kartika Selabumi Mining - Indonesia
- Kumho Petrochemical, South Korea
- Ministry of Transport, Egypt
- Port Waratah Coal Services - Australia
- Altura Mining Limited, Indonesia
- Singapore Mercantile Exchange
- Bukit Baiduri Energy - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Medco Energi Mining Internasional
- International Coal Ventures Pvt Ltd - India
- New Zealand Coal & Carbon
- PTC India Limited - India
- Binh Thuan Hamico - Vietnam
- ICICI Bank Limited - India
- Renaissance Capital - South Africa
- Interocean Group of Companies - India
- Sojitz Corporation - Japan
- Independent Power Producers Association of India
- Holcim Trading Pte Ltd - Singapore
- Meenaskhi Energy Private Limited - India
- Romanian Commodities Exchange
- Commonwealth Bank - Australia
- Cigading International Bulk Terminal - Indonesia
- Ceylon Electricity Board - Sri Lanka
- OPG Power Generation Pvt Ltd - India
- Electricity Authority, New Zealand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Baramulti Group, Indonesia
- Gujarat Sidhee Cement - India
- Ambuja Cements Ltd - India
- Riau Bara Harum - Indonesia
- Meralco Power Generation, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Salva Resources Pvt Ltd - India
- Minerals Council of Australia
- Miang Besar Coal Terminal - Indonesia
- Antam Resourcindo - Indonesia
- Aditya Birla Group - India
- PowerSource Philippines DevCo
- Kepco SPC Power Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- Central Electricity Authority - India
- Bhatia International Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Australian Commodity Traders Exchange
- Sarangani Energy Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kobexindo Tractors - Indoneisa
- Rio Tinto Coal - Australia
- Indian Oil Corporation Limited
- Xindia Steels Limited - India
- Coastal Gujarat Power Limited - India
- Vizag Seaport Private Limited - India
- Dalmia Cement Bharat India
- Manunggal Multi Energi - Indonesia
- GMR Energy Limited - India
- Krishnapatnam Port Company Ltd. - India
- Toyota Tsusho Corporation, Japan
- Sree Jayajothi Cements Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Parliament of New Zealand
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