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

posted in: Valuation | 0

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.

A Recent Decision in the Fisker Case Brings New Life to the Credit Bidding Debate

posted in: Claims Trading | 0

Author: Nelly Almeida, Weil Gotshal & Manges LLP

On January 10, 2014, the United States Bankruptcy Court for the District of Delaware in In re Fisker Automotive Holdings, Inc., et al., capped a secured lender’s right to credit bid its $168 million claim at $25 million (the amount it paid to purchase the claim). While the court noted that its decision was non-precedential, it may still have serious implications for the future of credit bidding.

Credit bidding has long been considered a fundamental protection afforded to secured creditors by section 363(k) of the Bankruptcy Code. Under section 363(k), at a sale of its assets, a secured creditor may “credit bid” the amount of its secured claim in lieu of cash unless the court “for cause” orders otherwise. The Fisker decision highlights the uncertainty surrounding what constitutes sufficient “cause” for a court to limit or abrogate a lender’s right to credit bid. In almost all cases where courts have found “cause,” the focus has been on whether there is a clearly defined existing dispute to a claim or lien. In Fisker, however, the court emphasized other “fairness” factors, such as the expedited nature of the proposed sale and the interest of promoting a fair auction, even though the opinion suggests that questions existed as to whether the potential credit bidder’s claims were secured. Thus, Fisker leaves us to wonder whether these “additional factors” would have been enough standing alone; indeed, what would have been enough?

A full length blog post discussing the decision and its implications can be found here.

EDITOR’S UPDATE: On February 20th, the US District for Delaware denied the secured creditor’s emergency motion for direct appeal to the Third Circuit.  Nelly Almeida’s description of the decision and the resulting auction can be found here.

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