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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, 28 June 24
INDIAN POWER STATIONS STOCKED WITH BUMPER COAL SUPPLY AS TRANSPORT WOES EASE - BUSINESS STANDARD
Even as power demand has touched a historic high of 250 gigawatts (Gw) amid sweltering heat this June, India’s power stations are stocked wit ...
Friday, 28 June 24
INDIA'S CY23 COAL USE LARGER THAN NORTH AMERICA, EUROPE COMBINED - THE HINDU
For the first time, India’s coal consumption surpassed that of North America and Europe combined in the calendar year 2023, said Energy Insti ...
Monday, 24 June 24
PLN'S FINANCIAL SUSTAINABILITY RESTS ON ACCELERATED COAL RETIREMENT AND RENEWABLES DEPLOYMENT - MUTYA YUSTIKA
On 28 May 2024, Indonesia’s national electricity utility, PT Perusahaan Listrik Negara (PLN), released its financial report for 2023. Althoug ...
Monday, 24 June 24
INDIA'S COAL-BASED POWER DEMAND AT ALL-TIME HIGH, GOVERNMENT SAYS - REUTERS
India’s demand for coal-based power has risen by 7.3% this fiscal year to an all-time high, the government said in a statement on Wednesday.
...
Monday, 24 June 24
CHINA'S COAL INDUSTRY TURNS GREENER THROUGH INNOVATIVE APPROACHES - PEOPLE'S DAILY
At an opencast mine operated by Inner Mongolia Pingzhuang Coal Group Co. Ltd., a subsidiary of CHN Energy Investment Group (CHN Energy), a 14-meter ...
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- Attock Cement Pakistan Limited
- Alfred C Toepfer International GmbH - Germany
- San Jose City I Power Corp, Philippines
- Parliament of New Zealand
- Samtan Co., Ltd - South Korea
- Mjunction Services Limited - India
- Carbofer General Trading SA - India
- India Bulls Power Limited - India
- Jaiprakash Power Ventures ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Straits Asia Resources Limited - Singapore
- Siam City Cement - Thailand
- Riau Bara Harum - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Petron Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- Chettinad Cement Corporation Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Thai Mozambique Logistica
- Wood Mackenzie - Singapore
- Offshore Bulk Terminal Pte Ltd, Singapore
- GN Power Mariveles Coal Plant, Philippines
- Kumho Petrochemical, South Korea
- Heidelberg Cement - Germany
- Sical Logistics Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- South Luzon Thermal Energy Corporation
- Tamil Nadu electricity Board
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- Standard Chartered Bank - UAE
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- Rio Tinto Coal - Australia
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- SMC Global Power, Philippines
- Anglo American - United Kingdom
- IHS Mccloskey Coal Group - USA
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- Mintek Dendrill Indonesia
- Oldendorff Carriers - Singapore
- Semirara Mining Corp, Philippines
- Sree Jayajothi Cements Limited - India
- Singapore Mercantile Exchange
- Vedanta Resources Plc - India
- Australian Commodity Traders Exchange
- Siam City Cement PLC, Thailand
- Neyveli Lignite Corporation Ltd, - India
- Bhushan Steel Limited - India
- Trasteel International SA, Italy
- Directorate General of MIneral and Coal - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Antam Resourcindo - Indonesia
- SMG Consultants - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Chamber of Mines of South Africa
- Romanian Commodities Exchange
- Metalloyd Limited - United Kingdom
- Directorate Of Revenue Intelligence - India
- Bhatia International Limited - India
- SN Aboitiz Power Inc, Philippines
- Altura Mining Limited, Indonesia
- Aditya Birla Group - India
- Economic Council, Georgia
- Simpson Spence & Young - Indonesia
- ASAPP Information Group - India
- Iligan Light & Power Inc, Philippines
- Central Java Power - Indonesia
- Marubeni Corporation - India
- GMR Energy Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Agrawal Coal Company - India
- CIMB Investment Bank - Malaysia
- PTC India Limited - India
- Electricity Authority, New Zealand
- International Coal Ventures Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Central Electricity Authority - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Sojitz Corporation - Japan
- Renaissance Capital - South Africa
- Gujarat Sidhee Cement - India
- Coalindo Energy - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Mercator Lines Limited - India
- Uttam Galva Steels Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Minerals Council of Australia
- GAC Shipping (India) Pvt Ltd
- Australian Coal Association
- TeaM Sual Corporation - Philippines
- Edison Trading Spa - Italy
- Vizag Seaport Private Limited - India
- Ministry of Transport, Egypt
- Kartika Selabumi Mining - Indonesia
- Karaikal Port Pvt Ltd - India
- Merrill Lynch Commodities Europe
- PowerSource Philippines DevCo
- Meenaskhi Energy Private Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Medco Energi Mining Internasional
- Power Finance Corporation Ltd., India
- Star Paper Mills Limited - India
- Commonwealth Bank - Australia
- Deloitte Consulting - India
- Indian Oil Corporation Limited
- Cigading International Bulk Terminal - Indonesia
- Salva Resources Pvt Ltd - India
- Parry Sugars Refinery, India
- Tata Chemicals Ltd - India
- Essar Steel Hazira Ltd - India
- European Bulk Services B.V. - Netherlands
- Baramulti Group, Indonesia
- Mercuria Energy - Indonesia
- London Commodity Brokers - England
- Kalimantan Lumbung Energi - Indonesia
- Bukit Baiduri Energy - Indonesia
- Kobexindo Tractors - Indoneisa
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
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- Latin American Coal - Colombia
- White Energy Company Limited
- Karbindo Abesyapradhi - Indoneisa
- The State Trading Corporation of India Ltd
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- PNOC Exploration Corporation - Philippines
- Ministry of Finance - Indonesia
- Toyota Tsusho Corporation, Japan
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- VISA Power Limited - India
- Bangladesh Power Developement Board
- Kepco SPC Power Corporation, Philippines
- Cement Manufacturers Association - India
- AsiaOL BioFuels Corp., Philippines
- ICICI Bank Limited - India
- Savvy Resources Ltd - HongKong
- Therma Luzon, Inc, Philippines
- Grasim Industreis Ltd - India
- Bharathi Cement Corporation - India
- Dalmia Cement Bharat India
- Bhoruka Overseas - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Energy Link Ltd, New Zealand
- Sakthi Sugars Limited - India
- Meralco Power Generation, Philippines
- Sindya Power Generating Company Private Ltd
- Gujarat Mineral Development Corp Ltd - India
- Africa Commodities Group - South Africa
- Makarim & Taira - Indonesia
- New Zealand Coal & Carbon
- Vijayanagar Sugar Pvt Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Pendopo Energi Batubara - Indonesia
- Bayan Resources Tbk. - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Kideco Jaya Agung - Indonesia
- Kaltim Prima Coal - Indonesia
- Eastern Coal Council - USA
- Indian Energy Exchange, India
- Miang Besar Coal Terminal - Indonesia
- Coastal Gujarat Power Limited - India
- Formosa Plastics Group - Taiwan
- Ambuja Cements Ltd - India
- MS Steel International - UAE
- Borneo Indobara - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Intertek Mineral Services - Indonesia
- Binh Thuan Hamico - Vietnam
- GVK Power & Infra Limited - India
- Georgia Ports Authority, United States
- Orica Australia Pty. Ltd.
- LBH Netherlands Bv - Netherlands
- Global Green Power PLC Corporation, Philippines
- Indogreen Group - Indonesia
- Interocean Group of Companies - India
- Sarangani Energy Corporation, Philippines
- Malabar Cements Ltd - India
- Price Waterhouse Coopers - Russia
- Global Business Power Corporation, Philippines
- Maheswari Brothers Coal Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Banpu Public Company Limited - Thailand
- Barasentosa Lestari - Indonesia
- Videocon Industries ltd - India
- Coal and Oil Company - UAE
- Indika Energy - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Wilmar Investment Holdings
- OPG Power Generation Pvt Ltd - India
- CNBM International Corporation - China
- Rashtriya Ispat Nigam Limited - India
- Semirara Mining and Power Corporation, Philippines
- IEA Clean Coal Centre - UK
- Port Waratah Coal Services - Australia
- Xindia Steels Limited - India
- Kapuas Tunggal Persada - Indonesia
- Ind-Barath Power Infra Limited - India
- Eastern Energy - Thailand
- Bulk Trading Sa - Switzerland
- Global Coal Blending Company Limited - Australia
- Electricity Generating Authority of Thailand
- McConnell Dowell - Australia
- Posco Energy - South Korea
- Indonesian Coal Mining Association
- Madhucon Powers Ltd - India
- Lanco Infratech Ltd - India
- Ministry of Mines - Canada
- Indo Tambangraya Megah - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Jindal Steel & Power Ltd - India
- Planning Commission, India
- Holcim Trading Pte Ltd - Singapore
- Orica Mining Services - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Energy Development Corp, Philippines
- Independent Power Producers Association of India
- The University of Queensland
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