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.

Lehman Bankruptcy Court Issues Safe Harbor Decision

Authors: Kathryn Borgeson, Mark Ellenberg, Lary Stromfeld, John Thompson

On December 19, 2013, Judge James M. Peck of the United States Bankruptcy Court for the Southern District of New York issued his latest decision in the Lehman Brothers cases addressing the scope of the safe harbor provisions of the Bankruptcy Code.  Michigan State Housing Development Authority v. Lehman Brothers Derivatives Products Inc. and Lehman Brothers Holdings Inc. (In re Lehman Brothers Holdings Inc.).  Judge Peck’s decision confirms that the contractual provisions specifying the method of calculating the settlement amount under a swap agreement are protected by the Bankruptcy Code’s safe harbors.  The decision follows the reasoning of the amicus brief filed by the International Swaps and Derivatives Association (“ISDA”), which was prepared by Cadwalader.  For a full discussion of the case and argument, please continue reading here.

 

Capmark Decision Clarifies Insider Status for Market Participants

Authors: Marshall S. Huebner and Hilary A.E. Dengel, Davis Polk

Being deemed an “insider” has important ramifications for creditors in bankruptcy and can materially impact a creditor’s risk and recovery profile in any case.

In Capmark Financial Group Inc. v. Goldman Sachs Credit Partners L.P. (Capmark), the U.S. District Court for the Southern District of New York made several positive rulings on key insider status issues favorable to market participants who regularly find themselves, sometimes through affiliated entities, playing multiple roles with respect to a borrower counterparty.  Embracing the arguments advanced by the Goldman Sachs lending entities, the court rejected Capmark’s attempts to cast the lenders as “insiders” of Capmark based on an indirect equity interest in Capmark held by funds managed by certain of their affiliates – holding that Capmark failed to allege facts that would show the “extraordinary circumstances” required for veil piercing and stating that participation in an arm’s length transaction as an ordinary commercial lender will not give rise to non-statutory insider status.

The Capmark decision provides comfort and greater certainty to market participants that, absent falling into one of the expressly enumerated categories of insiders under the Bankruptcy Code, insider status should not attach to creditors who neither control a company nor deal with it at less than arm’s length.  The case is further discussed here in Capmark:  Clarifying Insider Status for Market Participants (ABI Journal, January 2014).