Valuation In Maritime Chapter 11 Cases Under The U.S. Bankruptcy Code: Genco And 'NAV'

On July 2, 2014, several months after Genco Shipping Trading Limited, a dry bulk shipping company with a fleet of at least 53 vessels, and affiliated entities entered Chapter 11 with a prepackaged plan of reorganization, U.S. Bankruptcy Judge Sean Lane entered a confirmation order overruling objections to the plan from the Official Committee of Equity Holders of the Debtors (Mohawk Capital, Aurelius Capital Partners, and OZ Domestic Partners). In his order, Judge Lane held that the reorganization plan was fair and equitable and did not unfairly discriminate against the equity holders under 11 U.S.C. Section 1129(b) and was brought in good faith as required by 11 U.S.C. Section 1129(a)(3).

Disputing Genco's Calculated Value

The main disagreement centered on the debtors' value used in the plan and the method used by the debtors and the plan's opponent, the Equity Committee, to calculate that value. A minimum value of $1.48 billion was necessary for the equity holders to recover and not be "out of the money." The Equity Committee contended that the debtors' valuation analysis, which produced a value below the $1.48 billion mark, was improper and flawed, while the debtors and supporting creditors responded that the equity holders were fortunate to receive the recovery called for by the plan (warrants covering six percent of the new equity in exchange for the surrender or cancellation of their existing equity interests).

The debtors put on experts that testified that the value of the Genco company was in a range between $1.36 billion and $1.44 billion. The upper end of the range was near the $1.48 million floor, arguably justifying the warrant issue to old equity, which was characterized by the debtors as a gift. The Equity Committee put on experts that testified that the value of the Genco company was in a range between $1.54 billion to $1.91 billion. If the Equity Committee was found to be correct, then the debtors' complex reorganization plan would not be fair to old equity and could not be confirmed.1

When a shipping line is viable—when any business is viable— then Chapter 11 bankruptcy often becomes a fight over value between stakeholders at different levels of the capital structure; a fight over differing visions of "'the present worth of future anticipated earnings' of the debtor corporation."2 And that fight can be messy as "valuation is not an exact science."3 To quote the U.S. Supreme Court, "[M]ankind's foresight is limited. The uncertainties of future estimates are recognized."4

Valuation Methodologies

Generally, valuation methodologies are various and the precise use of a given appropriate method or appropriate methods will vary depending on the company in question, its market profile, and the proposed use of the valuation in bankruptcy.5

The Genco company, of course, was in bankruptcy because of a balance sheet problem. It was and is a viable dry bulk shipping...