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, 24 June 24
PHILIPPINES COAL SUPPLY ENOUGH UNTIL 2030 - PHILSTAR GLOBAL
The country’s existing coal-fired power plants are sufficient to ensure enough base load capacity in the next six years, Energy Secretary Rap ...
Friday, 14 June 24
NEXTDECADE, SAUDI ARAMCO SIGN 20-YEAR LNG SUPPLY DEAL - REUTERS
U.S. liquefied natural gas (LNG) provider NextDecade has signed a non-binding agreement with Saudi Aramco 2222.SE to supply 1.2 million tonnes per ...
Friday, 14 June 24
NEWBUILDING PRICES CLIMB 3% TO HIGHEST LEVEL IN 16 YEARS - NIELS RASMUSSEN
“Since the start of the year, newbuilding prices have risen 3% to their highest level since 2008. Compared to their most recent low in late 2 ...
Friday, 14 June 24
INDIA TARGETS HIGHER DOMESTIC COAL PRODUCTION, REDUCED IMPORTS: GOVT - REUTERS
India wants to reduce coal imports and increase domestic production, federal coal minister G. Kishan Reddy said on Thursday.
The cou ...
Thursday, 13 June 24
US LNG TO ASIA FOR POWER GENERATION EXPECTED TO CUT EMISSIONS VERSUS COAL - RYSTAD ENERGY
The value-chain emissions of liquified natural gas (LNG) are lower on average than for coal-fired power generation, even when the fuel is shipp ...
|
|
|
Showing 16 to 20 news of total 6871 |
|
 |
|
|
|
|
| |
|
 |
|
|
| |
|
- Mercuria Energy - Indonesia
- Rio Tinto Coal - Australia
- Timah Investasi Mineral - Indoneisa
- Karaikal Port Pvt Ltd - India
- Lanco Infratech Ltd - India
- Meenaskhi Energy Private Limited - India
- Anglo American - United Kingdom
- Makarim & Taira - Indonesia
- Parliament of New Zealand
- Eastern Energy - Thailand
- Pipit Mutiara Jaya. PT, Indonesia
- Globalindo Alam Lestari - Indonesia
- Global Business Power Corporation, Philippines
- Ceylon Electricity Board - Sri Lanka
- Xindia Steels Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Larsen & Toubro Limited - India
- Georgia Ports Authority, United States
- Sarangani Energy Corporation, Philippines
- VISA Power Limited - India
- Bhatia International Limited - India
- Indo Tambangraya Megah - Indonesia
- Antam Resourcindo - Indonesia
- Vedanta Resources Plc - India
- Wood Mackenzie - Singapore
- SN Aboitiz Power Inc, Philippines
- Australian Commodity Traders Exchange
- TNB Fuel Sdn Bhd - Malaysia
- Ind-Barath Power Infra Limited - India
- Kobexindo Tractors - Indoneisa
- Central Java Power - Indonesia
- Heidelberg Cement - Germany
- Tata Chemicals Ltd - India
- Coalindo Energy - Indonesia
- Latin American Coal - Colombia
- Leighton Contractors Pty Ltd - Australia
- Jindal Steel & Power Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Romanian Commodities Exchange
- Bulk Trading Sa - Switzerland
- Indian Energy Exchange, India
- South Luzon Thermal Energy Corporation
- Economic Council, Georgia
- Maheswari Brothers Coal Limited - India
- CNBM International Corporation - China
- Chettinad Cement Corporation Ltd - India
- Thai Mozambique Logistica
- Indogreen Group - Indonesia
- San Jose City I Power Corp, Philippines
- Minerals Council of Australia
- Sree Jayajothi Cements Limited - India
- Sindya Power Generating Company Private Ltd
- Billiton Holdings Pty Ltd - Australia
- CIMB Investment Bank - Malaysia
- Petrochimia International Co. Ltd.- Taiwan
- Semirara Mining Corp, Philippines
- Posco Energy - South Korea
- Sinarmas Energy and Mining - Indonesia
- Therma Luzon, Inc, Philippines
- Marubeni Corporation - India
- Indonesian Coal Mining Association
- Global Coal Blending Company Limited - Australia
- Ambuja Cements Ltd - India
- Uttam Galva Steels Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Sakthi Sugars Limited - India
- Edison Trading Spa - Italy
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Orica Australia Pty. Ltd.
- Vijayanagar Sugar Pvt Ltd - India
- ASAPP Information Group - India
- Oldendorff Carriers - Singapore
- Formosa Plastics Group - Taiwan
- Electricity Generating Authority of Thailand
- Cigading International Bulk Terminal - Indonesia
- Mercator Lines Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Jaiprakash Power Ventures ltd
- PTC India Limited - India
- GAC Shipping (India) Pvt Ltd
- Sojitz Corporation - Japan
- Goldman Sachs - Singapore
- Miang Besar Coal Terminal - Indonesia
- Ministry of Finance - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Directorate General of MIneral and Coal - Indonesia
- Parry Sugars Refinery, India
- Madhucon Powers Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- PowerSource Philippines DevCo
- Maharashtra Electricity Regulatory Commission - India
- IEA Clean Coal Centre - UK
- Kapuas Tunggal Persada - Indonesia
- Bukit Baiduri Energy - Indonesia
- Meralco Power Generation, Philippines
- LBH Netherlands Bv - Netherlands
- Vizag Seaport Private Limited - India
- OPG Power Generation Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Malabar Cements Ltd - India
- Straits Asia Resources Limited - Singapore
- Alfred C Toepfer International GmbH - Germany
- TeaM Sual Corporation - Philippines
- Tamil Nadu electricity Board
- Cement Manufacturers Association - India
- Krishnapatnam Port Company Ltd. - India
- Karbindo Abesyapradhi - Indoneisa
- Grasim Industreis Ltd - India
- New Zealand Coal & Carbon
- Essar Steel Hazira Ltd - India
- The Treasury - Australian Government
- Central Electricity Authority - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Planning Commission, India
- Pendopo Energi Batubara - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Indika Energy - Indonesia
- Australian Coal Association
- London Commodity Brokers - England
- Coastal Gujarat Power Limited - India
- Mjunction Services Limited - India
- Africa Commodities Group - South Africa
- European Bulk Services B.V. - Netherlands
- Standard Chartered Bank - UAE
- Bharathi Cement Corporation - India
- Bangladesh Power Developement Board
- Dalmia Cement Bharat India
- International Coal Ventures Pvt Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Baramulti Group, Indonesia
- Barasentosa Lestari - Indonesia
- Borneo Indobara - Indonesia
- Merrill Lynch Commodities Europe
- Intertek Mineral Services - Indonesia
- Ministry of Transport, Egypt
- Carbofer General Trading SA - India
- Interocean Group of Companies - India
- Directorate Of Revenue Intelligence - India
- Kohat Cement Company Ltd. - Pakistan
- Medco Energi Mining Internasional
- Videocon Industries ltd - India
- IHS Mccloskey Coal Group - USA
- Bukit Makmur.PT - Indonesia
- Bhushan Steel Limited - India
- Samtan Co., Ltd - South Korea
- SMC Global Power, Philippines
- Singapore Mercantile Exchange
- Energy Link Ltd, New Zealand
- Riau Bara Harum - Indonesia
- Manunggal Multi Energi - Indonesia
- Aditya Birla Group - India
- Binh Thuan Hamico - Vietnam
- Kartika Selabumi Mining - Indonesia
- Kepco SPC Power Corporation, Philippines
- Power Finance Corporation Ltd., India
- ICICI Bank Limited - India
- Altura Mining Limited, Indonesia
- Wilmar Investment Holdings
- Semirara Mining and Power Corporation, Philippines
- Mintek Dendrill Indonesia
- India Bulls Power Limited - India
- Banpu Public Company Limited - Thailand
- Siam City Cement PLC, Thailand
- Metalloyd Limited - United Kingdom
- Toyota Tsusho Corporation, Japan
- Aboitiz Power Corporation - Philippines
- Bhoruka Overseas - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Attock Cement Pakistan Limited
- Agrawal Coal Company - India
- GVK Power & Infra Limited - India
- Price Waterhouse Coopers - Russia
- SMG Consultants - Indonesia
- Petron Corporation, Philippines
- Energy Development Corp, Philippines
- McConnell Dowell - Australia
- Iligan Light & Power Inc, Philippines
- Holcim Trading Pte Ltd - Singapore
- Rashtriya Ispat Nigam Limited - India
- GMR Energy Limited - India
- Chamber of Mines of South Africa
- MS Steel International - UAE
- Star Paper Mills Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Indian Oil Corporation Limited
- Salva Resources Pvt Ltd - India
- The University of Queensland
- White Energy Company Limited
- Kalimantan Lumbung Energi - Indonesia
- Savvy Resources Ltd - HongKong
- Gujarat Electricity Regulatory Commission - India
- The State Trading Corporation of India Ltd
- Orica Mining Services - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Independent Power Producers Association of India
- Kumho Petrochemical, South Korea
- Deloitte Consulting - India
- Renaissance Capital - South Africa
- Gujarat Sidhee Cement - India
- Bayan Resources Tbk. - Indonesia
- Kideco Jaya Agung - Indonesia
- Port Waratah Coal Services - Australia
- Global Green Power PLC Corporation, Philippines
- Thiess Contractors Indonesia
- Electricity Authority, New Zealand
- Commonwealth Bank - Australia
- Simpson Spence & Young - Indonesia
- Ministry of Mines - Canada
- Coal and Oil Company - UAE
- PNOC Exploration Corporation - Philippines
- AsiaOL BioFuels Corp., Philippines
- Trasteel International SA, Italy
- Sical Logistics Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Siam City Cement - Thailand
- Eastern Coal Council - USA
|
| |
| |
|
