The newly appointed equity committee in the Chapter 11 proceedings of Genco Shipping & Trading asked the bankruptcy court overseeing the case to delay the hearing on approval of the company’s proposed disclosure statement and confirmation of its reorganization plan for at least 45 days, according to a May 12 motion.
The combined disclosure-statement/plan-confirmation hearing is currently set for June 3.
As reported, the company filed a prepackaged Chapter 11 on April 21 with overwhelming support from creditors. The prepackaged plan provides for lenders under the company’s 2007 credit agreement to receive 81.1% of the reorganized company’s equity, with the remainder of the equity distributed to holders of the company’s convertible debt (8.4%) and current management (1.8%), and 8.7% to be issued in connection with a $100 million rights offering.
Under the plan, current shareholders are to receive warrants to acquire up to 6% of the reorganized equity at a strike price based on an equity value of $1.295 billion. The company valued the warrants at $30-36 million, translating into a current value for the company’s stock of $0.67-0.81 per share, based on the Black-Scholes pricing model.
But trouble for an unimpeded prepack emerged at a hearing held on April 23 when Och-Ziff, which holds a 9.12% stake in the company, objected to the company’s restructuring-support agreement. Further, the hedge fund said in a filing with the Securities and Exchange Commission that it would seek the appointment of an equity committee in the case.
The bankruptcy court, however, kept the case on a fast track by approving the restructuring pact and setting a combined hearing on the adequacy of the disclosure statement and confirmation of the reorganization plan for June 3.
Subsequently, Aurelius Capital disclosed that it had acquired a 9.9% stake in the company’s equity and said it “may become actively involved in” and “seek to influence the outcome” of the company’s bankruptcy proceedings, including possibly proposing an alternative reorganization plan. Aurelius promptly appealed the court’s approval of the restructuring-support agreement.
Meanwhile, on May 9, the U.S. Trustee for the Manhattan bankruptcy court appointed an equity committee, naming Och-Ziff, Aurelius, and Mohawk Capital as its members.
In its motion seeking to delay the disclosure-statement/plan-confirmation hearing, the equity committee said it needed “a reasonable amount of time” to assess the company’s enterprise value, conduct discovery, engage in discussions with the company, and “investigate alternative restructuring transactions.” The panel added that it would also require time to “prepare for a contested disclosure statement and confirmation hearing.”
According to the equity panel’s motion, it is scheduled to meet today with the company. The committee said that ahead of the meeting it had asked the company to delay the disclosure-statement/plan-confirmation hearing, but Genco refused, citing, among other things, the effect of the bankruptcy on the company’s international operations – a refusal that the panel said “heightened” its concerns with the proposed prepackaged plan.
As might be expected, at the heart of the equity committee’s argument is the company’s valuation.
According to the committee, the prepackaged plan is premised on an enterprise value of $1.38 billion, even though “there is virtually no disclosure as to the derivation of the components of this figure.” What’s more, according to the panel, “even a small deviation in this total enterprise value calculation would yield a substantial recovery for equity, based on the debtors’ projected total liabilities of approximately $1.476 billion.”
The committee points to secondary market prices of the company’s debt as evidence that the company’s valuation is too low, particularly levels for the 2007 credit agreement that would receive the lion’s share of the reorganized equity. The credit trades above par, the committee noted, “demonstrating that market participants are willing to take the risk of prepayment at par to get the potential upside of substantial equity in the reorganized debtors.”
“Lastly, and perhaps most tellingly, the debtors themselves effectively concede that equity is in the money by virtue of proposing to provide equity a recovery under the prepack plan,” the committee said.
The committee said it “has already identified several issues that require further investigation,” citing the company’s own determination that assets exceeded liabilities by nearly $1 billion as of Feb. 28, and the fact that the company’s projected balance sheet for June 30 showed shareholders’ equity of $852 million – equity, the panel said, that “is conveniently wiped out purportedly by adjusting the value of vessels to their appraised value.”
The equity panel also picked a bone with the revenue projections management used in connection with its reorganization plan, noting that projections for 2014 and 2015 were based on the “bottom half” of certain estimates produced by research analysts covering the shipping sector, while projections for 2016 and 2017 were based on a base case for Baltic Index projections as of the first quarter of 2014.
“Perhaps not surprisingly,” the committee said, “projected revenue for 2016 and 2017 decreased significantly, and EBITDA also decreased significantly.”
Noting that management is slated to receive 1.8% of the reorganized equity in the company valued at $20 million, the committee alleged, “Although not known, this substantial equity entitlement could have tainted management’s decision to support the prepack plan, and indeed management may have been incentivized to skew the valuation analysis to support the results intended under the prepack plan.”
The committee said in the filing that that the company has agreed to a May 19 hearing on the delay motion. As of this morning, however, the bankruptcy court has not scheduled a hearing. – Alan Zimmerman