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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, 02 February 24
DRY BULK MARKET: THE DOWNWARD REVISION IN THE GROWTH OF CAPESIZE TONNE DAYS IN JANUARY WITH THE BCI DROPPING - MARIA BERTZELETOU
In the last week of January, the dry freight market sustained weakness in the Capesize segment, while the number of ballasters in the Southeast (SE ...
Friday, 02 February 24
COAL INDIA ACHIEVES NEARLY 80% OF ITS FY24 PRODUCTION TARGET IN TEN MONTHS - CNBCTV18
For the month of January, the company’s production grew by 9.1% from the same period last year to 78.4 Million Tonnes (MT), from 71.9 MT last ...
Thursday, 01 February 24
CHINA'S WIND, SOLAR CAPACITY TO OVERTAKE COAL IN 2024 - INDUSTRY BODY, REUTERS REPORTED
China’s installed wind and solar capacity is expected to overtake coal for the first time this year, according to industry forecasts.
&nb ...
Thursday, 01 February 24
ANTI-DEDUCTION CLAUSES: CAN A CHARTERER WITHHOLD HIRE WITHOUT AN OWNER'S CONSENT? - SKULD
KNOWLEDGE TO ELEVATE
Summary
In The Anna Dorothea, the Court found that where a charterparty provides that no deduction from hire may be m ...
Thursday, 01 February 24
INDIA REBUILDS COAL STOCKS TO ENSURE ELECTRIC RELIABILITY - REUTERS
India’s electricity supply is much more comfortable at the start of 2024 than in either 2023 or 2022 as coal production has ramped up and the ...
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- Coastal Gujarat Power Limited - India
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- Electricity Authority, New Zealand
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- New Zealand Coal & Carbon
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- Commonwealth Bank - Australia
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- Indian Oil Corporation Limited
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- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Standard Chartered Bank - UAE
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- Ceylon Electricity Board - Sri Lanka
- Bangladesh Power Developement Board
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- Siam City Cement PLC, Thailand
- Rio Tinto Coal - Australia
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- GN Power Mariveles Coal Plant, Philippines
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- Samtan Co., Ltd - South Korea
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- Antam Resourcindo - Indonesia
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- The State Trading Corporation of India Ltd
- Makarim & Taira - Indonesia
- Therma Luzon, Inc, Philippines
- Miang Besar Coal Terminal - Indonesia
- Vizag Seaport Private Limited - India
- Eastern Energy - Thailand
- South Luzon Thermal Energy Corporation
- Anglo American - United Kingdom
- Goldman Sachs - Singapore
- Malabar Cements Ltd - India
- White Energy Company Limited
- Ministry of Transport, Egypt
- Banpu Public Company Limited - Thailand
- Kumho Petrochemical, South Korea
- Asmin Koalindo Tuhup - Indonesia
- Kepco SPC Power Corporation, Philippines
- Central Java Power - Indonesia
- Singapore Mercantile Exchange
- MS Steel International - UAE
- SN Aboitiz Power Inc, Philippines
- Agrawal Coal Company - India
- Georgia Ports Authority, United States
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PetroVietnam Power Coal Import and Supply Company
- Energy Development Corp, Philippines
- IEA Clean Coal Centre - UK
- McConnell Dowell - Australia
- Bayan Resources Tbk. - Indonesia
- Indogreen Group - Indonesia
- Price Waterhouse Coopers - Russia
- Formosa Plastics Group - Taiwan
- AsiaOL BioFuels Corp., Philippines
- Edison Trading Spa - Italy
- Bhatia International Limited - India
- Carbofer General Trading SA - India
- Maharashtra Electricity Regulatory Commission - India
- Jorong Barutama Greston.PT - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Meenaskhi Energy Private Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Billiton Holdings Pty Ltd - Australia
- GAC Shipping (India) Pvt Ltd
- IHS Mccloskey Coal Group - USA
- Borneo Indobara - Indonesia
- Coal and Oil Company - UAE
- Cigading International Bulk Terminal - Indonesia
- Jindal Steel & Power Ltd - India
- Chamber of Mines of South Africa
- Tata Chemicals Ltd - India
- Straits Asia Resources Limited - Singapore
- European Bulk Services B.V. - Netherlands
- Orica Mining Services - Indonesia
- Bukit Makmur.PT - Indonesia
- Kobexindo Tractors - Indoneisa
- Coalindo Energy - Indonesia
- Heidelberg Cement - Germany
- Romanian Commodities Exchange
- Holcim Trading Pte Ltd - Singapore
- Kartika Selabumi Mining - Indonesia
- Meralco Power Generation, Philippines
- Jaiprakash Power Ventures ltd
- Minerals Council of Australia
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- Parliament of New Zealand
- Renaissance Capital - South Africa
- Independent Power Producers Association of India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- VISA Power Limited - India
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- OPG Power Generation Pvt Ltd - India
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- Energy Link Ltd, New Zealand
- Leighton Contractors Pty Ltd - Australia
- Altura Mining Limited, Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Cement Manufacturers Association - India
- Central Electricity Authority - India
- Deloitte Consulting - India
- Sojitz Corporation - Japan
- Kaltim Prima Coal - Indonesia
- San Jose City I Power Corp, Philippines
- Larsen & Toubro Limited - India
- Indian Energy Exchange, India
- CIMB Investment Bank - Malaysia
- Siam City Cement - Thailand
- Bhushan Steel Limited - India
- Eastern Coal Council - USA
- Iligan Light & Power Inc, Philippines
- Karaikal Port Pvt Ltd - India
- Electricity Generating Authority of Thailand
- Maheswari Brothers Coal Limited - India
- Uttam Galva Steels Limited - India
- Sree Jayajothi Cements Limited - India
- London Commodity Brokers - England
- Karbindo Abesyapradhi - Indoneisa
- Krishnapatnam Port Company Ltd. - India
- Manunggal Multi Energi - Indonesia
- Semirara Mining and Power Corporation, Philippines
- PTC India Limited - India
- Sinarmas Energy and Mining - Indonesia
- GVK Power & Infra Limited - India
- Port Waratah Coal Services - Australia
- Lanco Infratech Ltd - India
- Ministry of Mines - Canada
- Semirara Mining Corp, Philippines
- Global Coal Blending Company Limited - Australia
- Alfred C Toepfer International GmbH - Germany
- Directorate Of Revenue Intelligence - India
- Orica Australia Pty. Ltd.
- Sical Logistics Limited - India
- Gujarat Sidhee Cement - India
- The University of Queensland
- Bhoruka Overseas - Indonesia
- Bharathi Cement Corporation - India
- PNOC Exploration Corporation - Philippines
- Mintek Dendrill Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bulk Trading Sa - Switzerland
- Indonesian Coal Mining Association
- Attock Cement Pakistan Limited
- Sindya Power Generating Company Private Ltd
- ASAPP Information Group - India
- Kalimantan Lumbung Energi - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Ambuja Cements Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Economic Council, Georgia
- Sakthi Sugars Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Timah Investasi Mineral - Indoneisa
- Ind-Barath Power Infra Limited - India
- Posco Energy - South Korea
- Vedanta Resources Plc - India
- Simpson Spence & Young - Indonesia
- CNBM International Corporation - China
- Thai Mozambique Logistica
- Intertek Mineral Services - Indonesia
- Toyota Tsusho Corporation, Japan
- Tamil Nadu electricity Board
- Interocean Group of Companies - India
- Latin American Coal - Colombia
- GMR Energy Limited - India
- India Bulls Power Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Mercator Lines Limited - India
- Savvy Resources Ltd - HongKong
- Kideco Jaya Agung - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Planning Commission, India
- Sarangani Energy Corporation, Philippines
- Mjunction Services Limited - India
- Trasteel International SA, Italy
- Wilmar Investment Holdings
- Power Finance Corporation Ltd., India
- Petron Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- Baramulti Group, Indonesia
- Wood Mackenzie - Singapore
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