Applying the Proper Valuation for a Company's Industry

When Genco Shipping & Trading Ltd navigated its international operations through a $1.4 billion financial restructuring, one primary driver chartered its course—understanding the proper valuation of a drybulk shipping company. Drybulk shipping is a competitive, highly fragmented industry with low entry barriers. It mirrors the classic economic model of “perfect competition.” This dynamic is compounded by inherently volatile vessel charter rates, which adversely affect predicting reliable projections over time. Against this backdrop, Genco and its sophisticated creditor groups—consisting of numerous banks and institutional investors—successfully negotiated a Restructuring Support Agreement (RSA) and prepackaged Chapter 11 plan and, in doing so, understanding that the more “commonly used” restructuring valuation methodologies were not accurate benchmarks. Instead of relying upon (1) a discounted cash flow (DCF) analysis, (2) a comparable company approach, or (3) a precedent transaction approach, Genco focused on the fleet’s net asset values—NAV—in its negotiations. Projections were used to assess the feasibility of any restructuring for liquidity purposes—not to establish value.

This key understanding of industry-tailored valuation allowed Genco to foster consensus on the terms of a $1.2 billion conversion of debt to equity, raise $100 million of new liquidity, and restructure $250 million of remaining secured debt. Conversely, the failure of certain equity investors to appreciate the economic underpinnings of drybulk shipping led to a hotly contested valuation battle—a litigation that could have been avoided had the equity committee recognized that valuation in restructuring should take into account the undercurrents of the company’s industry. Giving substantial weight to the industry-specific NAV approach, the bankruptcy court overruled the equity committee’s confirmation objections, keeping the restructuring on course. This article discusses the importance of applying the optimal valuation methodology for the debtor’s industry, whether or not it is a “commonly-used” restructuring methodology.

Uses and Timing of Valuation in Bankruptcy