By Gabriel A. Morgan, Weil Gotshal LLP
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 In re Genco Shipping & Trading Limited, Case No. 14-11108 (Bankr. S.D.N.Y. July 2, 2014), the bankruptcy court explained that the DCF method is of limited use when projections of future cash flows are unreliable or difficult to ascertain. The bankruptcy court then found that accurate cash flow projections did not exist for Genco because dry bulk shipping rates are difficult to forecast due to the volatile nature of the dry bulk shipping market. 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. 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, and other industries, that experience significant volatility in rates.
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