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.
|
|
Friday, 23 February 24
STRONG OUTLOOK FOR THE TANKER MARKET IN 2024 AND BEYOND - DNV
Several factors have aligned over the past two years to create a robust and profitable market for tanker owners, which is expected to drive newbuil ...
Friday, 23 February 24
AUSTRALIAN COAL FLOWS TO ASIA HOVER ABOVE LAST YEAR’S VOLUME TONNES - SIGNAL GROUP
In the final days of February, the dry bulk freight market appeared to maintain a relatively stable momentum, particularly evident in the large ves ...
Friday, 23 February 24
RUSSIAN COAL SHIPMENTS FALL 14% AS SANCTIONS BITE - BIMCO
During the first seven weeks of 2024, Russian coal shipments have fallen 14% y/y. Volumes have gradually declined since October 2023 when logistica ...
Thursday, 22 February 24
BIMCO PUBLISHES SHIP FINANCING FORMS TO ENSURE UNINTERRUPTED USE OF SHIPS
BIMCO has published two standard Quiet Enjoyment Letters (QELs), the first standard form QELs available to the industry, to offer a tool that can e ...
Monday, 19 February 24
METALS INVESTMENT: THE DARKEST HOUR IS JUST BEFORE THE DAWN - WOOD MACKENZIE
Things often seem at their worst just before they get better. In terms of meeting our net zero 2050 scenario, we’ve reached a watershed momen ...
|
|
|
Showing 31 to 35 news of total 6871 |
|
 |
|
|
|
|
| |
|
 |
|
|
| |
|
- Port Waratah Coal Services - Australia
- Sree Jayajothi Cements Limited - India
- Agrawal Coal Company - India
- SMC Global Power, Philippines
- Bukit Makmur.PT - Indonesia
- Indogreen Group - Indonesia
- Simpson Spence & Young - Indonesia
- McConnell Dowell - Australia
- Indika Energy - Indonesia
- Orica Mining Services - Indonesia
- Indo Tambangraya Megah - Indonesia
- PTC India Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Jaiprakash Power Ventures ltd
- Miang Besar Coal Terminal - Indonesia
- Kartika Selabumi Mining - Indonesia
- Sakthi Sugars Limited - India
- Mercuria Energy - Indonesia
- Xindia Steels Limited - India
- Eastern Coal Council - USA
- Uttam Galva Steels Limited - India
- Holcim Trading Pte Ltd - Singapore
- CIMB Investment Bank - Malaysia
- GN Power Mariveles Coal Plant, Philippines
- CNBM International Corporation - China
- Kalimantan Lumbung Energi - Indonesia
- PNOC Exploration Corporation - Philippines
- Global Coal Blending Company Limited - Australia
- Aditya Birla Group - India
- Latin American Coal - Colombia
- International Coal Ventures Pvt Ltd - India
- Wood Mackenzie - Singapore
- Bahari Cakrawala Sebuku - Indonesia
- Coal and Oil Company - UAE
- Australian Coal Association
- Vijayanagar Sugar Pvt Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- GMR Energy Limited - India
- Electricity Generating Authority of Thailand
- Energy Development Corp, Philippines
- VISA Power Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Karaikal Port Pvt Ltd - India
- Rio Tinto Coal - Australia
- Alfred C Toepfer International GmbH - Germany
- Indian Oil Corporation Limited
- Videocon Industries ltd - India
- Borneo Indobara - Indonesia
- Straits Asia Resources Limited - Singapore
- Bayan Resources Tbk. - Indonesia
- Maheswari Brothers Coal Limited - India
- Mercator Lines Limited - India
- Semirara Mining and Power Corporation, Philippines
- Iligan Light & Power Inc, Philippines
- GAC Shipping (India) Pvt Ltd
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Cement Manufacturers Association - India
- Makarim & Taira - Indonesia
- Ministry of Finance - Indonesia
- Parliament of New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Meenaskhi Energy Private Limited - India
- European Bulk Services B.V. - Netherlands
- Meralco Power Generation, Philippines
- Sinarmas Energy and Mining - Indonesia
- Goldman Sachs - Singapore
- Petrochimia International Co. Ltd.- Taiwan
- India Bulls Power Limited - India
- Barasentosa Lestari - Indonesia
- Dalmia Cement Bharat India
- Timah Investasi Mineral - Indoneisa
- South Luzon Thermal Energy Corporation
- Vedanta Resources Plc - India
- Vizag Seaport Private Limited - India
- Interocean Group of Companies - India
- Australian Commodity Traders Exchange
- Mjunction Services Limited - India
- Global Business Power Corporation, Philippines
- Jindal Steel & Power Ltd - India
- Marubeni Corporation - India
- Bulk Trading Sa - Switzerland
- Oldendorff Carriers - Singapore
- Romanian Commodities Exchange
- Orica Australia Pty. Ltd.
- Lanco Infratech Ltd - India
- Sojitz Corporation - Japan
- Aboitiz Power Corporation - Philippines
- Coalindo Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Ministry of Transport, Egypt
- SN Aboitiz Power Inc, Philippines
- IHS Mccloskey Coal Group - USA
- Parry Sugars Refinery, India
- LBH Netherlands Bv - Netherlands
- Kohat Cement Company Ltd. - Pakistan
- Bhatia International Limited - India
- Edison Trading Spa - Italy
- Semirara Mining Corp, Philippines
- Ambuja Cements Ltd - India
- Sarangani Energy Corporation, Philippines
- ASAPP Information Group - India
- Metalloyd Limited - United Kingdom
- Chamber of Mines of South Africa
- Leighton Contractors Pty Ltd - Australia
- Maharashtra Electricity Regulatory Commission - India
- Indian Energy Exchange, India
- San Jose City I Power Corp, Philippines
- Indonesian Coal Mining Association
- GVK Power & Infra Limited - India
- Coastal Gujarat Power Limited - India
- Star Paper Mills Limited - India
- Kumho Petrochemical, South Korea
- Riau Bara Harum - Indonesia
- Sical Logistics Limited - India
- Petron Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- Trasteel International SA, Italy
- TeaM Sual Corporation - Philippines
- Larsen & Toubro Limited - India
- Antam Resourcindo - Indonesia
- Attock Cement Pakistan Limited
- Grasim Industreis Ltd - India
- Salva Resources Pvt Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Georgia Ports Authority, United States
- New Zealand Coal & Carbon
- Minerals Council of Australia
- Mintek Dendrill Indonesia
- AsiaOL BioFuels Corp., Philippines
- ICICI Bank Limited - India
- Wilmar Investment Holdings
- Karbindo Abesyapradhi - Indoneisa
- Essar Steel Hazira Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Energy Link Ltd, New Zealand
- Billiton Holdings Pty Ltd - Australia
- Intertek Mineral Services - Indonesia
- Malabar Cements Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- The University of Queensland
- Madhucon Powers Ltd - India
- Global Green Power PLC Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Directorate General of MIneral and Coal - Indonesia
- Bharathi Cement Corporation - India
- Kepco SPC Power Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- Kaltim Prima Coal - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Merrill Lynch Commodities Europe
- Commonwealth Bank - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Ceylon Electricity Board - Sri Lanka
- Deloitte Consulting - India
- OPG Power Generation Pvt Ltd - India
- Planning Commission, India
- Ind-Barath Power Infra Limited - India
- Directorate Of Revenue Intelligence - India
- Cigading International Bulk Terminal - Indonesia
- SMG Consultants - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Power Finance Corporation Ltd., India
- Heidelberg Cement - Germany
- Medco Energi Mining Internasional
- Standard Chartered Bank - UAE
- Siam City Cement PLC, Thailand
- Anglo American - United Kingdom
- Economic Council, Georgia
- White Energy Company Limited
- Renaissance Capital - South Africa
- Kobexindo Tractors - Indoneisa
- Tamil Nadu electricity Board
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Independent Power Producers Association of India
- Gujarat Sidhee Cement - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Manunggal Multi Energi - Indonesia
- Banpu Public Company Limited - Thailand
- Sindya Power Generating Company Private Ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Thai Mozambique Logistica
- Chettinad Cement Corporation Ltd - India
- Ministry of Mines - Canada
- Pendopo Energi Batubara - Indonesia
- Siam City Cement - Thailand
- Altura Mining Limited, Indonesia
- Baramulti Group, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- IEA Clean Coal Centre - UK
- Carbofer General Trading SA - India
- Bhushan Steel Limited - India
- Central Java Power - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Electricity Authority, New Zealand
- Savvy Resources Ltd - HongKong
- The Treasury - Australian Government
- Posco Energy - South Korea
- PowerSource Philippines DevCo
- Therma Luzon, Inc, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Binh Thuan Hamico - Vietnam
- Samtan Co., Ltd - South Korea
- Africa Commodities Group - South Africa
- The State Trading Corporation of India Ltd
- MS Steel International - UAE
- Tata Chemicals Ltd - India
- Central Electricity Authority - India
- Singapore Mercantile Exchange
- Eastern Energy - Thailand
- Formosa Plastics Group - Taiwan
- Bukit Baiduri Energy - Indonesia
- Bangladesh Power Developement Board
- Toyota Tsusho Corporation, Japan
- London Commodity Brokers - England
- Rashtriya Ispat Nigam Limited - India
- Bhoruka Overseas - Indonesia
- Thiess Contractors Indonesia
|
| |
| |
|
