Vol 11 (2014) - Issue 6

Article preview

Genco: Dry Bulk Shipping Valuations No Longer Anchored to Discounted Cash Flow Method

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 that the DCF method was inappropriate for the valuation of dry bulk shipping companies. In the same decision, the bankruptcy court also accorded substantial weight to an asset-based method: net asset valuation. 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, as well other industries that experience significant volatility in rates.

Genco and the prepackaged plan of reorganisation
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 United States Bankruptcy Code. Genco sought to implement a prepackaged plan of reorganisation that would consensually restructure approximately USD 1.48 billion in secured and unsecured debt. The Genco plan had the following key features:
(a) Approximately USD 1.2 billion of secured debt would be converted into equity in the reorganised company.
(b) New capital, in the amount of USD 100 million, would be invested through a fully-backstopped rights offering.
(c) The maturities for two secured prepetition facilities would be extended.
(d) Allowed general unsecured claims would be reinstated and paid in the ordinary course of business.
(e) Existing equity holders would receive warrants for up to 6% of the equity in the reorganised company.

Genco’s secured lenders and holders of unsecured convertible notes unanimously approved the plan.
The Genco plan was premised on an enterprise valuation between USD 1.36 billion and USD 1.44 billion. The debtors’ valuation relied entirely on their net asset valuation analysis, which is a common method for valuing shipping companies in non-bankruptcy contexts.

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:
(a) Aurelius Capital Partners LP,
(b) Mohawk Capital LLC, and
(c) 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 USD 1.54 billion and USD 1.91 billion. The equity committee contended 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, weighting each at 37.5%, 37.5%, 10%, and 15%, respectively.