What Will Common Shareholders Of Genco Shipping Get After The Restructuring

Apr. 6.14 | About: Genco Shipping (GNK)

Summary

The plan of restructuring proposed by the company is reasonable and is likely to be implemented.

As a result of this restructuring, common shareholders will receive warrants to buy new equity.

Based on Black-Scholes option pricing model, GNK stock is now significantly overvalued.

Last Thursday, Genco Shipping (NYSE:GNK) announced plan of restructuring. What common shareholders are going to get under this plan?

According to the plan, common shareholders are receiving seven year warrants for 6.0% of the New Genco Equity struck at a $1,295 million equity valuation. What is the value of these warrants?

First, we need to have a look at Genco Shipping's financial statements prior to reorganization. The latest available financial report is for Q3, 2013. However, it is not likely that significant changes in the balance sheet happened since the end of last September.

After deconsolidation of Baltic Trading Limited (NYSE:BALT), the balance sheet of Genco looks like this:

Assets:

Net working capital, including cash $39 million

Market value of vessels (in current values) $1,314 million

Market value of Baltic stock (current market price) $40 million

Market value of Jinhui stock (current market price) $64 million

Total assets $1,457 million

Liabilities:

Secured Long-term Debt $1,314 million

Unsecured Convertible Notes $120 million

Total liabilities $1,434 million

Long-term debt is secured by all vessels, Baltic stock and Jinhui stock. In case of liquidation, assets are usually sold with a discount to market, which means that secured creditors will be unimpaired, while unsecured bondholders are going to get just a fraction of the face value. Common shareholders would receive nothing in this case.

To avoid the liquidation, the management of the company negotiated a reorganization plan. Under this plan, $1,056 million (2007 Credit Facility) of secured debt and all unsecured convertible notes will be converted to equity. In addition to it, $100 million in new equity will be raised. Pro-forma balance sheet of the reorganized company looks like this:

Assets:

Net working capital, including cash $139 million

Market value of vessels (in current values) $1,314 million

Market value of Baltic stock (current market price) $40 million

Market value of Jinhui stock (current market price) $64 million

Total assets $1,557 million

Liabilities:

Secured Long-term Debt $258 million

Total liabilities $258 million

Net asset value $1,299 million

Secured creditors convert debt to equity at a price very close to NAV, which means they are unimpaired. Claims of unsecured note holders will be impaired by about 10%. Common shareholders will get seven year warrants exercisable at a price close to NAV, which is still better than nothing.

This deal is supported by secured creditors who are clearly in the driver's seat in this case. After all, Genco pledged them virtually all of its assets as collateral. So, the probability of this deal to come through is very high.

So, what is the value of warrants that common shareholders are going to get? As you remember, common shareholders are receiving seven year warrants for 6.0% of the New Genco Equity struck at a $1,295 million equity valuation.

$1,295 million is very close to NAV, so basically, this is a seven year option to buy the stock at current market price. To keep share to share comparison, let's assume that New Genco will have 740 million shares outstanding. In this case, 6% will be 44.4 million shares and each old Genco share will be converted to an option to buy one new Genco share at $1,295 / 740 = $1.75.

As I told, it is quite safe to assume the market price of New Genco Equity at NAV. However, to show different outcomes, it is better to calculate the value of the option, assuming different premiums to NAV.

Another important assumption that will have to be made is volatility. Below is the table showing the value of the option based on different volatility and premium to NAV, using Black-Scholes option pricing model.

Volatility

Premium to NAV

0

10

20

30

40

20

0.39

0.50

0.64

0.77

0.92

30

0.56

0.68

0.81

0.94

1.09

40

0.72

0.85

0.99

1.12

1.26

50

0.88

1.00

1.15

1.29

1.43

Click to enlarge

Diana Shipping (NYSE:DSX), which has similar low leverage capital structure, like New Genco, trades at a price close to NAV. Implied volatility of its long-term options is about 40%.

So, taking DSX as the example, fair value of GNK should be about $0.72 per share. However, it is important to remember that the process of restructuring will take at least a year. The New Genco will make an IPO significantly later, if ever. Such timeframe significantly reduces time value of option.

Anyway, current market price of GNK is very overvalued by any metrics.

Disclosure: I am short GNK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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