United States: Valuation In Maritime Chapter 11 Cases Under The U.S. Bankruptcy Code: Genco And "NAV"

Last Updated: October 24 2014
Article by Michael B. Schaedle, Alan M. Root and David G. Meyer

On July 2, 2014, several months after Genco Shipping Trading Limited, a dry bulk shipping company with a fleet of at least 53 vessels, and affiliated entities entered Chapter 11 with a prepackaged plan of reorganization, U.S. Bankruptcy Judge Sean Lane entered a confirmation order overruling objections to the plan from the Official Committee of Equity Holders of the Debtors (Mohawk Capital, Aurelius Capital Partners, and OZ Domestic Partners). In his order, Judge Lane held that the reorganization plan was fair and equitable and did not unfairly discriminate against the equity holders under 11 U.S.C. Section 1129(b) and was brought in good faith as required by 11 U.S.C. Section 1129(a)(3).

Disputing Genco's Calculated Value

The main disagreement centered on the debtors' value used in the plan and the method used by the debtors and the plan's opponent, the Equity Committee, to calculate that value. A minimum value of $1.48 billion was necessary for the equity holders to recover and not be "out of the money." The Equity Committee contended that the debtors' valuation analysis, which produced a value below the $1.48 billion mark, was improper and flawed, while the debtors and supporting creditors responded that the equity holders were fortunate to receive the recovery called for by the plan (warrants covering six percent of the new equity in exchange for the surrender or cancellation of their existing equity interests).

The debtors put on experts that testified that the value of the Genco company was in a range between $1.36 billion and $1.44 billion. The upper end of the range was near the $1.48 million floor, arguably justifying the warrant issue to old equity, which was characterized by the debtors as a gift. The Equity Committee put on experts that testified that the value of the Genco company was in a range between $1.54 billion to $1.91 billion. If the Equity Committee was found to be correct, then the debtors' complex reorganization plan would not be fair to old equity and could not be confirmed.1

When a shipping line is viable—when any business is viable— then Chapter 11 bankruptcy often becomes a fight over value between stakeholders at different levels of the capital structure; a fight over differing visions of "'the present worth of future anticipated earnings' of the debtor corporation."2 And that fight can be messy as "valuation is not an exact science."3 To quote the U.S. Supreme Court, "[M]ankind's foresight is limited. The uncertainties of future estimates are recognized."4

Valuation Methodologies

Generally, valuation methodologies are various and the precise use of a given appropriate method or appropriate methods will vary depending on the company in question, its market profile, and the proposed use of the valuation in bankruptcy.5

The Genco company, of course, was in bankruptcy because of a balance sheet problem. It was and is a viable dry bulk shipping line with a valuable fleet and substantial cash flow. Genco was and is a going concern, and the challenge before the Court was to determine its reorganization value. Generally, in the valuation of such a firm, the Court should focus and account fully for the tangible and intangible value of the firm, consider the quality of the Genco management team, and the projected future cash flows.6

Judge Lane noted that there are three primary methods for valuing a company in a Chapter 11 reorganization: (1) discounted cash flow analysis ("DCF"); (2) market multiple or comparable company approach; and (3) comparable/ precedent transaction approach. However, the debtors' valuation relied on a fourth method: net asset value, or "NAV," which is "based on independent appraisals that incorporate an impartial assessment of the broadest, most concrete consensus regarding future earnings." The debtors did address other methodologies as a "sanity check" to confirm their NAV-based valuation outcome. In contrast, the Equity Committee contended that all four methods should be used together, with DCF weighted most heavily as the methodology that best captured the tangible and intangible value of a reorganizing going concern.

The Court did a fine and comprehensive job of describing the methodologies in question. Judge Lane noted that the DCF method finds for the "net present value" of a company by projecting unlevered free cash flows over a forecast period, discounting those cash flows using a rate based on the company's weighted average cost of capital, and then adding in a present value normed "terminal value" for free cash flows after the forecast period. Comparable company analysis refers to comparable company value, norming the values by reference to variables such as revenue, earning, and cash flows, and applying a market multiple. Precedent transaction methodology looks at comparable transactions, weighting varying circumstances and using purchase prices and earnings/cash flow/ EBITDA information for a subject company to derive a total enterprise value.

Understanding the "NAV" Analysis

The "NAV" value is as described above, and is a sum of fleet component appraisal values and other asset values (investment property, cash, and key contracts). The debtors' expert on vessel values did not appear to have physically inspected Genco's fleet vessels. Rather, the expert evaluated each vessel by reviewing three sets of fleet appraisals (including a set from his own firm and from the firm that was analyzing cash flow information) and then applying three assessment tools to find a final value: (1) econometric modeling (based on the expert's own proprietary models and algorithms and the normed earning power of each vessel, yielding a $1.215 billion fleet value); (2) time series analysis (market vessel price averages, yielding a $1.26 billion value); and (3) "last done" analysis (reports on recent sales and "market intelligence" on comparable vessel sales, yielding a $1.121 billion value).

The debtors' expert also evaluated survey data, operational history, vessel age, and similar factors, which adjusted these measures, yielding a "charter free market value" for the debtors' vessels of $1.211 billion. Then the Blackstone firm, the debtor's primary strategic/financial advisor, took the vessel expert's NAV vessel analysis and combined the vessel value with attributed values for net working capital, investment property, service contracts, and some other fixed assets to create the final NAV range of $1.364 billion to $1.444 billion with a $1.393 billion median.

In fighting the plan, as noted, the Equity Committee largely relied on a DCF analysis, which supported a $1.661 billion to $2.274 billion valuation range for Genco. The Committee had their expert on charter rates create adjusted rate projections, which were then used by Rothschild, the Committee's primary strategic advisor from the financial side, to calculate a terminal value based on certain factors, and to otherwise assert the valuation range above.7

The Court's Determination

Judge Lane found that DCF was not an appropriate method for the Genco case "largely due to the highly speculative nature of rate projections for the dry bulk shipping industry."8 Instead, he found NAV to be appropriate as the main driver of a valuation analysis in the Genco case given the unique nature of the dry bulk shipping business, in combination with the comparable company analysis and to a lesser extent comparable transaction, and agreed with the debtors in concluding that the proper valuation does not reach the $1.48 billion mark. Based on the foregoing, under Judge Lane's order, the equity holders would be "out of the money" by approximately $87 million and only entitled to receive the warrant package under the approved plan.

The Court carefully considered the evidence presented by the debtors and the Equity Committee on valuation, and its decision is thoughtful and detailed—well worth reviewing in contexts where fleet valuation is an issue. A number of key themes emerged in the Court's decision:

  • According to the Court, the Equity Committee "did not question [the debtors' vessel valuation expert's] methodology," but relied on argument and expert opinion that NAV is the wrong method to value an ongoing business in Chapter 11. Testing an expert's informational sources to identify biases, hearsay, and comparable data set variances is critical in assisting a court in evaluating and weighing such testimony.
  • The debtors' primary valuation opinions were sourced from experts who were not key debtor strategic advisors. The Equity Committee's primary valuation opinion was offered by one of its key strategic advisors, the Rothschild firm. Use of a strategic advisor in this capacity can enable broad discovery on client goals and approaches, which can inform how a court approaches testimony and opinions on value.
  • When each team put up experts to address charter rates (the key to the Equity Committee's DCF-based valuation), the Equity Committee used an expert who is an industry leader, a former shipping concern CEO with a strong market-making reputation, whereas the debtors used a firm that forecasts shipping rates as a core part of its business. This Court responded more favorably to the deeper quantitative grounding of the debtors' expert's opinions on rates, as opposed to the qualitative expertise of the Committee's expert in evaluating such forecasts.
  • When the Court evaluated all other valuation methodologies, the debtors smartly led the Court back to how NAV values either mirrored certain results or was a methodology used in a related process, like the giving of a transaction fairness opinion.
  • The Court found that it was notable that no player on the Equity Committee was willing to buy into the debtors' capital structure post-emergence at the valuation levels suggested by the Committee.

Footnotes

1. There were a number of other issues litigated at the Genco confirmation, including the "good faith" of the plan proposed (an argument that rode largely and practically on the Equity Committee being successful in convincing the Court that their position on value was correct) and the extent of third-party releases granted under the plan. This note does not address these points.

2. In re Genco Shipping & Trading Limited, et al.("Genco"), 513 B.R. 233, 243 (Bankr. S.D.N.Y. 2014) (citations omitted). "The basic question in a valuation for reorganization purposes is how much the enterprise can earn." Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad, 318 U.S. 523, 540, rehearing denied, 318 U.S. 803 (1943).

3. Id. at 242.

4. Reconstruction Finance Corp. v. Denver & Rio Grande Western Railroad Co., 328 U.S. 495, 522 n.29, rehearing denied, 329 U.S. 824-25 (1946).

5. Genco, 513 B.R. at 243; I. Ratner, G.T. Stein, J.C. Weitnauer, Business Valuation and Bankruptcy at 25 (2009) ("When valuing a business as a going concern, [an asset valuation approach, an income valuation approach, and a market valuation approach] should be considered prior to choosing the most appropriate valuation approach (or approaches) to use. Entities that are going concerns are typically valued using the market approach and/or the income approach. However, depending on the industry, the asset approach may also be appropriate. For example, asset-intensive businesses with low profitability relative to their invested capital may be more appropriately valued using the asset approach under a going-concern assumption"); see also Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 955-56 (1997) (method of valuation varies depending on debtor's use of its assets).

6. Genco, 513 B.R. at 247 (noting that the Equity Committee argues that an asset-based valuation methodology violates what Judge Lane likewise regards as a generally accepted reorganization valuation approach and thus is inappropriate; Judge Lane nevertheless focused on the specific characteristics of the dry bulk carrier sector in the maritime industry and as developed further in the opinion, found the "NAV" approach the best method for Genco, its plan, its reorganization, and its sector).

7. The debtors had Blackstone create a parallel DCF analysis, which, unsurprisingly, yielded a valuation range similar to that identified by the debtor NAV model. Id. at 255 fn. 32.

8. Id. at 244. The decision conceded that DCF is a "traditional" analysis often used to determine reorganization value, but noted that DCF only works when a company accurately projects future cash flows. On cross examination, the Equity Committee's experts conceded that dry bulk shipping rates are "volatile and the industry can be characterized as cyclical." Id. at 255. Blackstone, the debtors' strategic advisor and NAV valuation aggregator, concluded that "[i]n the global drybulk shipping industry, charter rates are inherently volatile and can change drastically on a daily basis. This makes charter rates difficult to predict and cash flow projections inherently unreliable." Id. Accordingly, on what it described as largely undisputed testimony, the Court ruled that the dry bulk market was fragmented, with low barriers to entry, and little opportunity for market participants to differentiate themselves. This leads to a context according to the Judge where daily market supply and demand conditions determine rates on a daily basis, constraining the ability to project cash flows in DCF analysis. Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions