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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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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
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Monday, 08 January 24
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Capesize
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Friday, 05 January 24
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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
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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 ...
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- GAC Shipping (India) Pvt Ltd
- Bank of Tokyo Mitsubishi UFJ Ltd
- Australian Coal Association
- McConnell Dowell - Australia
- Ind-Barath Power Infra Limited - India
- Petron Corporation, Philippines
- Kumho Petrochemical, South Korea
- Banpu Public Company Limited - Thailand
- Lanco Infratech Ltd - India
- San Jose City I Power Corp, Philippines
- Billiton Holdings Pty Ltd - Australia
- PowerSource Philippines DevCo
- Indo Tambangraya Megah - Indonesia
- Africa Commodities Group - South Africa
- South Luzon Thermal Energy Corporation
- London Commodity Brokers - England
- Sarangani Energy Corporation, Philippines
- SMG Consultants - Indonesia
- Rio Tinto Coal - Australia
- Kideco Jaya Agung - Indonesia
- Sindya Power Generating Company Private Ltd
- Coal and Oil Company - UAE
- Malabar Cements Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Price Waterhouse Coopers - Russia
- Antam Resourcindo - Indonesia
- Anglo American - United Kingdom
- Global Coal Blending Company Limited - Australia
- Petrochimia International Co. Ltd.- Taiwan
- Minerals Council of Australia
- Toyota Tsusho Corporation, Japan
- Timah Investasi Mineral - Indoneisa
- Ministry of Mines - Canada
- Borneo Indobara - Indonesia
- Straits Asia Resources Limited - Singapore
- Formosa Plastics Group - Taiwan
- Aditya Birla Group - India
- Binh Thuan Hamico - Vietnam
- Eastern Energy - Thailand
- Larsen & Toubro Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Parliament of New Zealand
- Sical Logistics Limited - India
- Semirara Mining Corp, Philippines
- International Coal Ventures Pvt Ltd - India
- Siam City Cement PLC, Thailand
- Aboitiz Power Corporation - Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Electricity Authority, New Zealand
- CIMB Investment Bank - Malaysia
- Bukit Baiduri Energy - Indonesia
- Medco Energi Mining Internasional
- India Bulls Power Limited - India
- Australian Commodity Traders Exchange
- Thai Mozambique Logistica
- Chamber of Mines of South Africa
- Riau Bara Harum - Indonesia
- Deloitte Consulting - India
- Heidelberg Cement - Germany
- Gujarat Electricity Regulatory Commission - India
- Posco Energy - South Korea
- ICICI Bank Limited - India
- Bulk Trading Sa - Switzerland
- The State Trading Corporation of India Ltd
- Coastal Gujarat Power Limited - India
- Cement Manufacturers Association - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Standard Chartered Bank - UAE
- Merrill Lynch Commodities Europe
- Sojitz Corporation - Japan
- Marubeni Corporation - India
- Xindia Steels Limited - India
- Metalloyd Limited - United Kingdom
- OPG Power Generation Pvt Ltd - India
- Mercuria Energy - Indonesia
- Tamil Nadu electricity Board
- Jorong Barutama Greston.PT - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Cigading International Bulk Terminal - Indonesia
- Bharathi Cement Corporation - India
- TNB Fuel Sdn Bhd - Malaysia
- Bangladesh Power Developement Board
- Intertek Mineral Services - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Dalmia Cement Bharat India
- Electricity Generating Authority of Thailand
- Interocean Group of Companies - India
- Vijayanagar Sugar Pvt Ltd - India
- Siam City Cement - Thailand
- Tata Chemicals Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Goldman Sachs - Singapore
- PTC India Limited - India
- Eastern Coal Council - USA
- Singapore Mercantile Exchange
- Independent Power Producers Association of India
- The University of Queensland
- Wilmar Investment Holdings
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Globalindo Alam Lestari - Indonesia
- Bayan Resources Tbk. - Indonesia
- Salva Resources Pvt Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Barasentosa Lestari - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Economic Council, Georgia
- Bhoruka Overseas - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Essar Steel Hazira Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- GMR Energy Limited - India
- GVK Power & Infra Limited - India
- PNOC Exploration Corporation - Philippines
- Kapuas Tunggal Persada - Indonesia
- Energy Link Ltd, New Zealand
- Indonesian Coal Mining Association
- Kepco SPC Power Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Attock Cement Pakistan Limited
- Edison Trading Spa - Italy
- Maharashtra Electricity Regulatory Commission - India
- Grasim Industreis Ltd - India
- Miang Besar Coal Terminal - Indonesia
- TeaM Sual Corporation - Philippines
- Indian Oil Corporation Limited
- Central Java Power - Indonesia
- Kartika Selabumi Mining - Indonesia
- Planning Commission, India
- Neyveli Lignite Corporation Ltd, - India
- Bukit Asam (Persero) Tbk - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Sinarmas Energy and Mining - Indonesia
- IHS Mccloskey Coal Group - USA
- Pendopo Energi Batubara - Indonesia
- Star Paper Mills Limited - India
- Ministry of Transport, Egypt
- Oldendorff Carriers - Singapore
- Kaltim Prima Coal - Indonesia
- Ceylon Electricity Board - Sri Lanka
- AsiaOL BioFuels Corp., Philippines
- VISA Power Limited - India
- Madhucon Powers Ltd - India
- SN Aboitiz Power Inc, Philippines
- Energy Development Corp, Philippines
- Latin American Coal - Colombia
- Indian Energy Exchange, India
- MS Steel International - UAE
- CNBM International Corporation - China
- Uttam Galva Steels Limited - India
- Bukit Makmur.PT - Indonesia
- New Zealand Coal & Carbon
- Altura Mining Limited, Indonesia
- The Treasury - Australian Government
- Sakthi Sugars Limited - India
- Manunggal Multi Energi - Indonesia
- Indogreen Group - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Indika Energy - Indonesia
- Wood Mackenzie - Singapore
- Renaissance Capital - South Africa
- Baramulti Group, Indonesia
- Simpson Spence & Young - Indonesia
- Commonwealth Bank - Australia
- Meenaskhi Energy Private Limited - India
- Georgia Ports Authority, United States
- Port Waratah Coal Services - Australia
- Vedanta Resources Plc - India
- Makarim & Taira - Indonesia
- Ambuja Cements Ltd - India
- Global Business Power Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- Videocon Industries ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mintek Dendrill Indonesia
- SMC Global Power, Philippines
- Agrawal Coal Company - India
- Semirara Mining and Power Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Karaikal Port Pvt Ltd - India
- Coalindo Energy - Indonesia
- Mercator Lines Limited - India
- Sree Jayajothi Cements Limited - India
- Global Green Power PLC Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Thiess Contractors Indonesia
- Orica Australia Pty. Ltd.
- Holcim Trading Pte Ltd - Singapore
- Meralco Power Generation, Philippines
- Kobexindo Tractors - Indoneisa
- Carbofer General Trading SA - India
- IEA Clean Coal Centre - UK
- Savvy Resources Ltd - HongKong
- ASAPP Information Group - India
- White Energy Company Limited
- LBH Netherlands Bv - Netherlands
- Bhushan Steel Limited - India
- Power Finance Corporation Ltd., India
- Directorate Of Revenue Intelligence - India
- Chettinad Cement Corporation Ltd - India
- Mjunction Services Limited - India
- Trasteel International SA, Italy
- Maheswari Brothers Coal Limited - India
- Jaiprakash Power Ventures ltd
- Kalimantan Lumbung Energi - Indonesia
- Romanian Commodities Exchange
- Iligan Light & Power Inc, Philippines
- Vizag Seaport Private Limited - India
- Orica Mining Services - Indonesia
- Bhatia International Limited - India
- Central Electricity Authority - India
- Jindal Steel & Power Ltd - India
- European Bulk Services B.V. - Netherlands
- Ministry of Finance - Indonesia
- Parry Sugars Refinery, India
- Gujarat Sidhee Cement - India
- Pipit Mutiara Jaya. PT, Indonesia
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