There should be a Miranda warning for valuation analysts: “Your prior statements may be held against you and jeopardize your valuation.” This was the court’s message to a major financial advisory firm in a recent bankruptcy decision.
Unique industry: The debtor, one of the world’s largest dry bulk shippers, was overleveraged and sought to implement a consensual debt conversion restructuring that most of its lenders supported. But the equity committee objected because under the plan the existing equity holders would receive warrants in exchange for the surrender or cancellation of their equity interests. The warrants covered 6% of the new equity. Consequently, the debtors sought confirmation under the Bankruptcy Code’s “cramdown” provision, arguing the plan was “fair and equitable.” The issue was whether the company’s total enterprise value exceeded $1.48 billion. This amount represented the payments due for claims that had to be paid before the equity holders could recover. To value the company, the debtors’ experts used the three traditional methods—discounted cash flow, comparable companies, and precedent transactions—but urged the court to adopt an NAV analysis given the nature of the industry. It was, they explained, extremely competitive, highly fragmented, and had low barriers of entry. There were hardly any change-in-control transactions in recent years; most of them were in the form of vessel sales. The NAV produced a range of values below $1.48 billion. In contrast, the equity committee’s financial advisor wanted to assign most of the weight to the values resulting from the DCF and comparable companies analyses. The expert’s DCF produced results that were significantly higher than those from the other methods, ranging from a low $1.66 billion to a high $1.97 billion.
‘Forgone conclusion’? The court gave substantial weight to the NAV. At the same time, it said the comparable companies analysis was “equally useful,” and there even was “limited utility” to the precedent transaction method. But the court found “many good reasons” to reject the DCF in this case. For one, there were no accurate projections. All parties agreed that dry bulk shipping rates were extremely volatile and difficult to predict. Also, in discussing the future of the industry, the equity committee’s expert relied on a survey of 13 equity analysts, only five of whom relied on the DCF for their assessment, the court pointed out. More problematic still was the financial advisory firm’s prior record. For example, the firm had presented written materials to an equity holder in which it noted that financial experts in two recent shipping cases rejected the traditional methodologies in favor of fleet valuation and market indicators of value. Also, in making a pitch to serve as the debtors’ financial advisor prior to the bankruptcy filing, the equity committee’s appraiser allowed for a shortfall in collateral value based on the appraiser’s preliminary analysis. When it did not get the job, the appraiser changed its viewpoint. There was evidence that the valuation fight was part of a strategy the appraiser had proposed to an equity holder for gaining leverage and taking control of the restructuring process without actually contributing money to the restructuring. This record, the court said, “creates a troubling impression” that the equity committee’s appraiser was tied to the strategy and its valuation was a “forgone conclusion.” Ultimately, the court found that the debtor’s plan was fair and equitable and approved it.
Takeaway: Experts need to keep track of their records in a case and of public statements in general and should know that inconsistent positions can come back to haunt them.
Find an expanded discussion of In re Genco Shipping & Trading Ltd., 2014 Bankr. LEXIS 2854 (July 2, 2014), in the November issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.
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