The official equity committee appointed in the Chapter 11 proceedings of Genco Shipping & Trading puts the company’s total enterprise value, or TEV, at $1.54-$1.91 billion, with a mid-point of $1.725 billion.
According to a June 20 affidavit filed with the bankruptcy court overseeing the case by Rothschild’s Neil Augustine, the panel’s valuation expert, that TEV results in a value in excess of claims that would be available for distribution to equity holders of $97-$467 million, with a mid-point of $282 million.
Assuming 43.57 million shares outstanding, that translates into a per-share value of $2.23 to $10.72, with a mid-point of $6.47.
The company’s stock was trading at $1.73 this afternoon. Since its prepackaged Chapter 11 filing on April 21, Genco’s equity has traded from a low of $1.40 on April 22, to a high of $2.30 on May 12.
The committee’s valuation contrasts with the estimated TEV contained in the company’s disclosure statement that forms the basis for its proposed reorganization plan, which is $1.343 billion.
As reported, given total claims in the case of $1.447 billion, that valuation leaves equity out of the money.
As reported, under the company’s proposed reorganization plan, the reorganized equity is to be distributed to holders of the company’s 2007 credit agreement and convertible note claims, as well as to participants in a contemplated $100 million rights offering. Current shareholders are to receive a “gift” distribution of warrants to acquire up to 6% of the reorganized equity at a strike price based on an equity value of $1.295 billion. The warrants are valued at $30-36 million, or $0.67-0.81 per share of the company’s current equity, based on the Black-Scholes pricing model.
The equity panel has challenged the company’s valuation. The bankruptcy court set aside four days for the contested plan confirmation hearing, two of which, June 13 and 14, passed relatively uneventfully.
The hearing is scheduled to resume today and tomorrow in bankruptcy court in Manhattan, at which time the equity committee will make its case. These sessions promise to be more contentious.
While the company and the committee’s valuations differ with respect to the company’s financial forecasts – with the equity committee arguing that the company specifically adopted a limited and singularly negative view of its prospects in order to justify its depressed valuation – the crux of the dispute between the two valuations appears to lie more squarely in their respective methodologies, according to Augustine’s affidavit.
In a nut shell, the company’s valuation, prepared by Blackstone, relies solely – and unjustifiably, in Augustine’s view – on an analysis of the value of the company’s various assets, primarily the company’s fleet, management contracts, interest in subsidiaries, net working capital, and other fixed assets, while Rothschild’s analysis looked at four different methodologies (comparable company, precedent transaction, discounted cash flow, and assessed break-up value), assigning various weightings to each (with only a 15% weighting assigned to the assessed break-up asset value analysis).
Among other things, the Rothschild valuation also looked at secondary market trading in the company’s prepetition claims arising under the company’s 2007 credit facility (which would receive 81.1% of the reorganized equity) and convertible debt (which would receive 8.4% of the reorganized equity) since the announcement of the company’s restructuring support agreement, concluding that secondary market trading levels in the credit agreement claims implied an enterprise value of $1.529-$1.605 billion for the company, resulting in value above claims of $86-$162 million, and trading in the convertible debt implied an enterprise value of $1.537-$1.684 billion, resulting in value above claims of $94-$241 million.
“To be clear, this market implied valuation is not a valuation methodology and was not used to determine Rothschild’s valuation conclusion,” Augustine said in his affidavit, “but it nonetheless is indicative of a market based value upon which sophisticated institutional investors are buying and selling Genco’s debt securities, which under the plan will be exchanged for equity, and thus provides a useful benchmark for the valuation ranges determined by Rothschild.” What’s more, Augustine notes, “The market indications of value are likely to be below the true value of Genco as buyers of Genco debt securities have to consider the probability of Genco not confirming the current plan or having their debt paid off at par.” – Alan Zimmerman