- Genco shareholders to get 6% of new company in the form of warrants.
- The valuation the warrants will be based on seems expensive compared to DryShips, Diana Shipping, and Navios Maritime Partners.
- The final terms of the bankruptcy could be even worse.
Time up. Much of Genco Shipping & Trading's (GNK) $1.9 billion in liabilities came due on March 31, extended to April 1, and then extended another three days. Of course these tiny extensions on such a large debt didn't seem very promising as the biggest trouble seemed to loom which was bankruptcy. That trouble has now come. Shareholders will be left with nothing but crumbs, and even those crumbs won't have any value unless a post-bankruptcy Genco has a similar valuation to DryShips (NASDAQ:DRYS), Diana Shipping (NYSE:DSX), and Navios Maritime Partners (NYSE:NMM) which doesn't look promising.
In an 8K SEC filing, Genco gave the details of the proposed Chapter 11 bankruptcy plan. The bankruptcy itself shouldn't have come as a surprise. As stated in my article linked above:
The conference call that followed offered little hope. When asked about the debt negotiations, Chief Financial Officer John C. Wobensmith added, "There are still a lot of banks with their own balance sheet issues who are going to have different views from some of the banks that have strong balance sheets." It doesn't sound like Genco's lenders are eager to bend.
So now what? The proposed terms of the bankruptcy, like most bankruptcies, leave equity shareholders (the common stock) out in the cold with virtually nothing. The short version is that the debt holders and insiders will be carving up ownership of the company among themselves while shareholders will get a token among of warrants that are just about worthless. From the 8K:
the cancellation of all equity interests in the Company, with such equity interests receiving seven year warrants for 6.0% of the New Genco Equity struck at a $1,295 million equity valuation (the "New Genco Warrants").
Allow me to explain. 94% of the company will be instantly disappearing from ownership by the common shareholders. The other 6% is in the form of warrants. Warrants give holders the right without the obligation to buy into a security at a fixed price. According to this calculation, a somewhat generous reasonable valuation for the warrants is $15 million based the Black-Sholes pricing model. $15 million in value comes out to around $0.30 per share.
The problem deepens for Genco in that even that $0.30 valuation is based on an equity valuation of $1.295 billion for the new stock. $1.295 billion seems quite generous. Consider that at the time of this writing, DryShips had a market cap of $1.32 billion. Diana Shipping had a market cap of $965 million. Navios Maritime Partners had a market cap of $1.46 billion. Can Genco be a titan among these?
Navios Maritime Partners for example is a company that is so profitable it pays a 9% dividend yield. Analysts expect Navios Maritimes Partners to earn $0.89 per share next year on revenue of $256 million. Navios Maritimes Partners has been around a long time and has a long and credible history of success.
Diana Shipping has a bit of a reputation of being more conservative but consistent throughout the years. Analysts expect Diana Shipping to earn $0.56 per share next year on revenue of $249 million.
DryShips meanwhile is a combination of a dry shipping company, a tanker company, and a drilling company. The drilling side of the business is a separate company called Ocean Rig (NASDAQ:ORIG). Since DryShips is a majority owner of Ocean Rig, it reports the two separate companies' results the DryShips results. Analysts expect $0.57 in earnings per share next year on revenue of $2.42 billion.
Genco on the other hand has been losing money on a GAAP earnings basis at an alarming clip. While much of that has been due to interest expense which will be eliminated entirely through the bankruptcy reorganization, Genco has still been posting sizable operating losses even before interest expense. It would seem that the restructured company still has a lot of work to do before it can even realistically even be thought of trading with a valuation on par with DryShips, Diana Shipping, or Navios Maritime Partners.
I wouldn't buy Genco at any price until the reorganization completes and a new trading symbol begins then it might be worth taking a look. Until then, we can't even be sure that the little sliver of any value that shareholders are left with will even ultimately be accepted by all the creditors and approved by the bankruptcy court.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.