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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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Wednesday, 12 June 24
CHINA ACCOUNTS FOR 16.3% OF AUSTRALIA'S COAL EXPORTS, FOLLOWED BY INDIA 14.4% - BANCHERO COSTA
Global coal trade has really picked up pace in recent months, and is now fully back to pre-Covid levels says Banchero Costa in its latest report.
...
Wednesday, 12 June 24
LNG NEWBUILDING VALUES AT RECORD HIGH: 78 NEWBUILD ORDERS PLACED IN 2024, DOUBLING 2023 - VESON NAUTICAL
The number of LNG newbuilding orders have more than doubled from the same period last year where 34 orders were placed, compared to 78 in the first ...
Monday, 10 June 24
CHINA'S MAY COAL IMPORTS RISE 11% ON LOWER DOMESTIC OUTPUT - REUTERS
China’s imports of coal rose 11% in May from a year earlier, customs data and Reuters records showed on Friday, as lower domestic output this ...
Tuesday, 04 June 24
HOW DO WESTERN SANCTIONS ON RUSSIA IMPACT THE GLOBAL METALS, MINING AND COAL MARKETS - WOOD MACKENZIE
The geopolitical landscape for Russia, as a major supplier of various commodities, has undergone a dramatic transformation since the invasion of Uk ...
Friday, 22 March 24
CASE STUDY: DANGERS OF COAL CARGO - SKULD
Recently, a bulk cargo vessel carrying coal from South Africa to Singapore suffered a fatal accident, resulting in the deaths of three crew members ...
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Showing 21 to 25 news of total 6871 |
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- TeaM Sual Corporation - Philippines
- Alfred C Toepfer International GmbH - Germany
- Salva Resources Pvt Ltd - India
- Wilmar Investment Holdings
- Kumho Petrochemical, South Korea
- Metalloyd Limited - United Kingdom
- Ministry of Finance - Indonesia
- Edison Trading Spa - Italy
- Rashtriya Ispat Nigam Limited - India
- Jaiprakash Power Ventures ltd
- London Commodity Brokers - England
- Eastern Coal Council - USA
- Xindia Steels Limited - India
- Sarangani Energy Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Offshore Bulk Terminal Pte Ltd, Singapore
- Global Coal Blending Company Limited - Australia
- Bayan Resources Tbk. - Indonesia
- Pendopo Energi Batubara - Indonesia
- Indogreen Group - Indonesia
- Africa Commodities Group - South Africa
- Straits Asia Resources Limited - Singapore
- Attock Cement Pakistan Limited
- SMG Consultants - Indonesia
- Barasentosa Lestari - Indonesia
- Indo Tambangraya Megah - Indonesia
- New Zealand Coal & Carbon
- Renaissance Capital - South Africa
- Neyveli Lignite Corporation Ltd, - India
- Singapore Mercantile Exchange
- SMC Global Power, Philippines
- Makarim & Taira - Indonesia
- Minerals Council of Australia
- Ministry of Mines - Canada
- Interocean Group of Companies - India
- Baramulti Group, Indonesia
- Siam City Cement - Thailand
- Parliament of New Zealand
- Bahari Cakrawala Sebuku - Indonesia
- Ambuja Cements Ltd - India
- Coastal Gujarat Power Limited - India
- SN Aboitiz Power Inc, Philippines
- Georgia Ports Authority, United States
- Bhoruka Overseas - Indonesia
- Therma Luzon, Inc, Philippines
- Miang Besar Coal Terminal - Indonesia
- Larsen & Toubro Limited - India
- Directorate Of Revenue Intelligence - India
- Semirara Mining and Power Corporation, Philippines
- Simpson Spence & Young - Indonesia
- Planning Commission, India
- Sree Jayajothi Cements Limited - India
- Global Green Power PLC Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- Dalmia Cement Bharat India
- Global Business Power Corporation, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Karbindo Abesyapradhi - Indoneisa
- Central Electricity Authority - India
- Wood Mackenzie - Singapore
- Sinarmas Energy and Mining - Indonesia
- Deloitte Consulting - India
- CIMB Investment Bank - Malaysia
- Krishnapatnam Port Company Ltd. - India
- Ceylon Electricity Board - Sri Lanka
- Tamil Nadu electricity Board
- Billiton Holdings Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- Bhushan Steel Limited - India
- Asmin Koalindo Tuhup - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Gujarat Electricity Regulatory Commission - India
- Bangladesh Power Developement Board
- Oldendorff Carriers - Singapore
- India Bulls Power Limited - India
- Posco Energy - South Korea
- Holcim Trading Pte Ltd - Singapore
- Mercator Lines Limited - India
- Chamber of Mines of South Africa
- Bank of Tokyo Mitsubishi UFJ Ltd
- IEA Clean Coal Centre - UK
- TNB Fuel Sdn Bhd - Malaysia
- Lanco Infratech Ltd - India
- Grasim Industreis Ltd - India
- Indika Energy - Indonesia
- Samtan Co., Ltd - South Korea
- ASAPP Information Group - India
- PetroVietnam Power Coal Import and Supply Company
- Romanian Commodities Exchange
- Price Waterhouse Coopers - Russia
- Riau Bara Harum - Indonesia
- Orica Australia Pty. Ltd.
- Mintek Dendrill Indonesia
- GAC Shipping (India) Pvt Ltd
- Kideco Jaya Agung - Indonesia
- PTC India Limited - India
- Energy Development Corp, Philippines
- Semirara Mining Corp, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Coalindo Energy - Indonesia
- Australian Commodity Traders Exchange
- PowerSource Philippines DevCo
- Goldman Sachs - Singapore
- Marubeni Corporation - India
- Orica Mining Services - Indonesia
- Power Finance Corporation Ltd., India
- Chettinad Cement Corporation Ltd - India
- Vizag Seaport Private Limited - India
- International Coal Ventures Pvt Ltd - India
- Sindya Power Generating Company Private Ltd
- Aditya Birla Group - India
- Banpu Public Company Limited - Thailand
- Jindal Steel & Power Ltd - India
- Intertek Mineral Services - Indonesia
- Videocon Industries ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Mjunction Services Limited - India
- Formosa Plastics Group - Taiwan
- Maharashtra Electricity Regulatory Commission - India
- Gujarat Sidhee Cement - India
- Bhatia International Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Toyota Tsusho Corporation, Japan
- Madhucon Powers Ltd - India
- Coal and Oil Company - UAE
- Eastern Energy - Thailand
- Merrill Lynch Commodities Europe
- Vijayanagar Sugar Pvt Ltd - India
- Siam City Cement PLC, Thailand
- Standard Chartered Bank - UAE
- Independent Power Producers Association of India
- VISA Power Limited - India
- The University of Queensland
- Leighton Contractors Pty Ltd - Australia
- Petrochimia International Co. Ltd.- Taiwan
- Cement Manufacturers Association - India
- Meenaskhi Energy Private Limited - India
- Iligan Light & Power Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Central Java Power - Indonesia
- Binh Thuan Hamico - Vietnam
- Thiess Contractors Indonesia
- Timah Investasi Mineral - Indoneisa
- Heidelberg Cement - Germany
- Medco Energi Mining Internasional
- Uttam Galva Steels Limited - India
- Savvy Resources Ltd - HongKong
- GN Power Mariveles Coal Plant, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Economic Council, Georgia
- Maheswari Brothers Coal Limited - India
- South Luzon Thermal Energy Corporation
- Vedanta Resources Plc - India
- Pipit Mutiara Jaya. PT, Indonesia
- PNOC Exploration Corporation - Philippines
- Anglo American - United Kingdom
- Malabar Cements Ltd - India
- Latin American Coal - Colombia
- White Energy Company Limited
- Petron Corporation, Philippines
- Bulk Trading Sa - Switzerland
- Tata Chemicals Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Antam Resourcindo - Indonesia
- Sical Logistics Limited - India
- Thai Mozambique Logistica
- Kapuas Tunggal Persada - Indonesia
- ICICI Bank Limited - India
- Cigading International Bulk Terminal - Indonesia
- Sakthi Sugars Limited - India
- Sojitz Corporation - Japan
- Star Paper Mills Limited - India
- Rio Tinto Coal - Australia
- Indonesian Coal Mining Association
- Trasteel International SA, Italy
- Indian Oil Corporation Limited
- GMR Energy Limited - India
- Commonwealth Bank - Australia
- Kartika Selabumi Mining - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ind-Barath Power Infra Limited - India
- Bukit Makmur.PT - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Parry Sugars Refinery, India
- Manunggal Multi Energi - Indonesia
- Kepco SPC Power Corporation, Philippines
- Indian Energy Exchange, India
- Australian Coal Association
- GVK Power & Infra Limited - India
- Essar Steel Hazira Ltd - India
- Borneo Indobara - Indonesia
- European Bulk Services B.V. - Netherlands
- Agrawal Coal Company - India
- Carbofer General Trading SA - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Ministry of Transport, Egypt
- Electricity Generating Authority of Thailand
- The State Trading Corporation of India Ltd
- OPG Power Generation Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Electricity Authority, New Zealand
- Bharathi Cement Corporation - India
- Altura Mining Limited, Indonesia
- Meralco Power Generation, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Globalindo Alam Lestari - Indonesia
- Energy Link Ltd, New Zealand
- The Treasury - Australian Government
- CNBM International Corporation - China
- Aboitiz Power Corporation - Philippines
- IHS Mccloskey Coal Group - USA
- McConnell Dowell - Australia
- Kohat Cement Company Ltd. - Pakistan
- Mercuria Energy - Indonesia
- Bukit Baiduri Energy - Indonesia
- MS Steel International - UAE
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