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

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By Gabriel A. Morgan, Weil Gotshal LLP

PITCH_Morgan_Gabriel_22091Discounted 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.

The full discussion can be found here.

Valuation Methodologies: A Judge’s View

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Author: the Hon. Christopher S. Sontchi

There are a variety of methodologies to determine the value of assets that are routinely presented to bankruptcy courts: (i) asset-based valuation, (ii) discounted cash flow or “DCF” valuation, and (iii) relative valuation approaches, which include the “comparable company analysis” and the “comparable transaction analysis.”

This article explains in layman’s terms each of the methodologies and how they are used to reach a conclusion as to value.  An asset based valuation generally calculates the liquidation value of individual assets and aggregates them to arrive at a firm value.  DCF valuation calculates the value of any asset from the present value of expected future cash flows from it, which, in turn, rests on the proposition that a dollar today is worth more than a dollar tomorrow.  Relative valuation involves the pricing of comparable assets, standardized using a common variable such as earnings, cash flows, book value, or revenues.  The conclusion rests on the selection of the valuation metric, e.g., EBITDA, and the similarity of the companies or transactions used.  The conclusions from each of the methodologies are generally blended to arrive at a conclusion of value.

The article closes by noting that bankruptcy judges have become familiar and comfortable with the DCF, comparable companies and comparable transactions methodologies, which are often referred to as the “standard” methodologies.  Departures from the standard methodologies or how they are calculated must be explained to the judge.

This article was published in the American Bankruptcy Institute Law Review (20 Am. Bankr. Inst. L. Rev. 1 (2012)) and is available online here.