We welcome article submissions from experts in the areas of coal, mining,
shipping, etc.
To Submit your article please click here.
|
|
|
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
If you believe an article violates your rights or the rights of others, please contact us.
|
|
Monday, 08 January 24
KOSPO TO BUY 80000 MT OF INDONESIAN LOW CALORIFIC VALUE COAL FOR FEB 2024
Korea Southern Power Co., Ltd. (KOSPO), is inviting bids for the supply of Indonesian Low Calorific Value Coal from qualified suppliers for Korean ...
Monday, 08 January 24
SEABORNE TRADE REACHES 12.4BN TONNES - CLARKSONS
China will establish a back-up coal production system by 2027 to stabilise prices and secure coal supply, the state planner said on Wednesday, even ...
Monday, 08 January 24
CAPESIZES START THE NEW YEAR ON POSITIVE NOTE - BALTIC EXCHANGE
Capesize
This week the capsize market has been marked by a mix of activities and challenges. Despite a slow start following the Christmas and N ...
Friday, 05 January 24
MORGAN STANLEY SEES LOWER OIL PRICES IN 2024 ON OVERSUPPLY CONCERNS - REUTERS
Morgan Stanley sees Brent crude prices anchored near $80 per barrel in the first half in 2024 before declining towards the end of the year as it ex ...
Friday, 05 January 24
INDIA'S COAL OUTPUT RISES NEARLY 11 PC IN DEC TO 92.87 MT - PTI
India’s coal production increased by 10.75 per cent to 92.87 million tonne in December 2023 as compared to the year-ago period, an official s ...
|
|
|
Showing 56 to 60 news of total 6871 |
|
 |
|
|
|
|
| |
|
 |
|
|
| |
|
- Singapore Mercantile Exchange
- Independent Power Producers Association of India
- PetroVietnam Power Coal Import and Supply Company
- Ind-Barath Power Infra Limited - India
- Formosa Plastics Group - Taiwan
- Indian Energy Exchange, India
- Semirara Mining Corp, Philippines
- India Bulls Power Limited - India
- The Treasury - Australian Government
- Indogreen Group - Indonesia
- Bukit Makmur.PT - Indonesia
- GVK Power & Infra Limited - India
- Electricity Generating Authority of Thailand
- Tata Chemicals Ltd - India
- Star Paper Mills Limited - India
- Cigading International Bulk Terminal - Indonesia
- Aboitiz Power Corporation - Philippines
- Alfred C Toepfer International GmbH - Germany
- Bhatia International Limited - India
- Georgia Ports Authority, United States
- Riau Bara Harum - Indonesia
- Globalindo Alam Lestari - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Kapuas Tunggal Persada - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Jaiprakash Power Ventures ltd
- VISA Power Limited - India
- San Jose City I Power Corp, Philippines
- Lanco Infratech Ltd - India
- Bhushan Steel Limited - India
- Simpson Spence & Young - Indonesia
- Ministry of Transport, Egypt
- Altura Mining Limited, Indonesia
- Grasim Industreis Ltd - India
- Borneo Indobara - Indonesia
- Commonwealth Bank - Australia
- Indo Tambangraya Megah - Indonesia
- Anglo American - United Kingdom
- Bank of Tokyo Mitsubishi UFJ Ltd
- Sakthi Sugars Limited - India
- Sree Jayajothi Cements Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Petrochimia International Co. Ltd.- Taiwan
- Kohat Cement Company Ltd. - Pakistan
- European Bulk Services B.V. - Netherlands
- Asmin Koalindo Tuhup - Indonesia
- Xindia Steels Limited - India
- Trasteel International SA, Italy
- GMR Energy Limited - India
- Thiess Contractors Indonesia
- Thai Mozambique Logistica
- Mjunction Services Limited - India
- Indian Oil Corporation Limited
- Parliament of New Zealand
- MS Steel International - UAE
- Electricity Authority, New Zealand
- Kumho Petrochemical, South Korea
- Straits Asia Resources Limited - Singapore
- Edison Trading Spa - Italy
- Pipit Mutiara Jaya. PT, Indonesia
- Makarim & Taira - Indonesia
- Renaissance Capital - South Africa
- Latin American Coal - Colombia
- Romanian Commodities Exchange
- Semirara Mining and Power Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- Standard Chartered Bank - UAE
- Central Java Power - Indonesia
- Orica Australia Pty. Ltd.
- Parry Sugars Refinery, India
- Jindal Steel & Power Ltd - India
- Bukit Baiduri Energy - Indonesia
- Australian Commodity Traders Exchange
- PNOC Exploration Corporation - Philippines
- Kartika Selabumi Mining - Indonesia
- Mercuria Energy - Indonesia
- OPG Power Generation Pvt Ltd - India
- TeaM Sual Corporation - Philippines
- Economic Council, Georgia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Coalindo Energy - Indonesia
- Petron Corporation, Philippines
- Carbofer General Trading SA - India
- Minerals Council of Australia
- Bangladesh Power Developement Board
- Ministry of Mines - Canada
- Ministry of Finance - Indonesia
- Rio Tinto Coal - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Global Green Power PLC Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- Goldman Sachs - Singapore
- Energy Link Ltd, New Zealand
- Ambuja Cements Ltd - India
- LBH Netherlands Bv - Netherlands
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Vijayanagar Sugar Pvt Ltd - India
- The State Trading Corporation of India Ltd
- Gujarat Mineral Development Corp Ltd - India
- Dalmia Cement Bharat India
- Essar Steel Hazira Ltd - India
- Directorate Of Revenue Intelligence - India
- Bulk Trading Sa - Switzerland
- Interocean Group of Companies - India
- McConnell Dowell - Australia
- Madhucon Powers Ltd - India
- Billiton Holdings Pty Ltd - Australia
- ICICI Bank Limited - India
- Malabar Cements Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Jorong Barutama Greston.PT - Indonesia
- Karaikal Port Pvt Ltd - India
- Sojitz Corporation - Japan
- Offshore Bulk Terminal Pte Ltd, Singapore
- New Zealand Coal & Carbon
- Power Finance Corporation Ltd., India
- TNB Fuel Sdn Bhd - Malaysia
- Sarangani Energy Corporation, Philippines
- Chettinad Cement Corporation Ltd - India
- Indika Energy - Indonesia
- Eastern Coal Council - USA
- Larsen & Toubro Limited - India
- Planning Commission, India
- Directorate General of MIneral and Coal - Indonesia
- Aditya Birla Group - India
- Posco Energy - South Korea
- Binh Thuan Hamico - Vietnam
- South Luzon Thermal Energy Corporation
- Siam City Cement - Thailand
- Wilmar Investment Holdings
- CIMB Investment Bank - Malaysia
- Therma Luzon, Inc, Philippines
- Attock Cement Pakistan Limited
- Videocon Industries ltd - India
- Baramulti Group, Indonesia
- International Coal Ventures Pvt Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Intertek Mineral Services - Indonesia
- Kepco SPC Power Corporation, Philippines
- Leighton Contractors Pty Ltd - Australia
- IEA Clean Coal Centre - UK
- Mercator Lines Limited - India
- Indonesian Coal Mining Association
- Coal and Oil Company - UAE
- Maheswari Brothers Coal Limited - India
- Bhoruka Overseas - Indonesia
- Kaltim Prima Coal - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Kobexindo Tractors - Indoneisa
- CNBM International Corporation - China
- IHS Mccloskey Coal Group - USA
- Vedanta Resources Plc - India
- Kideco Jaya Agung - Indonesia
- Iligan Light & Power Inc, Philippines
- Africa Commodities Group - South Africa
- Orica Mining Services - Indonesia
- Toyota Tsusho Corporation, Japan
- SMC Global Power, Philippines
- ASAPP Information Group - India
- Sindya Power Generating Company Private Ltd
- Agrawal Coal Company - India
- AsiaOL BioFuels Corp., Philippines
- Siam City Cement PLC, Thailand
- Price Waterhouse Coopers - Russia
- Mintek Dendrill Indonesia
- Deloitte Consulting - India
- PTC India Limited - India
- Meenaskhi Energy Private Limited - India
- Vizag Seaport Private Limited - India
- SN Aboitiz Power Inc, Philippines
- Banpu Public Company Limited - Thailand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kalimantan Lumbung Energi - Indonesia
- Coastal Gujarat Power Limited - India
- Holcim Trading Pte Ltd - Singapore
- London Commodity Brokers - England
- Marubeni Corporation - India
- Central Electricity Authority - India
- Heidelberg Cement - Germany
- Eastern Energy - Thailand
- SMG Consultants - Indonesia
- Samtan Co., Ltd - South Korea
- Metalloyd Limited - United Kingdom
- White Energy Company Limited
- Barasentosa Lestari - Indonesia
- The University of Queensland
- Chamber of Mines of South Africa
- Oldendorff Carriers - Singapore
- Wood Mackenzie - Singapore
- Timah Investasi Mineral - Indoneisa
- Gujarat Electricity Regulatory Commission - India
- Antam Resourcindo - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Bharathi Cement Corporation - India
- Global Business Power Corporation, Philippines
- Australian Coal Association
- PowerSource Philippines DevCo
- Uttam Galva Steels Limited - India
- Bayan Resources Tbk. - Indonesia
- Cement Manufacturers Association - India
- Salva Resources Pvt Ltd - India
- Gujarat Sidhee Cement - India
- Energy Development Corp, Philippines
- Rashtriya Ispat Nigam Limited - India
- Medco Energi Mining Internasional
- Merrill Lynch Commodities Europe
- Global Coal Blending Company Limited - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Port Waratah Coal Services - Australia
- Tamil Nadu electricity Board
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- GAC Shipping (India) Pvt Ltd
- Meralco Power Generation, Philippines
- Pendopo Energi Batubara - Indonesia
- Savvy Resources Ltd - HongKong
- Sical Logistics Limited - India
|
| |
| |
|
