Thursday, April 3, 2014

Estimate of Genco Shipping Warrant Valuation $GNK

This was just sent to me:

Estimated valuation of the existing stock's warrants to buy equity of reorganized Genco, valued using Black-Scholes model. Inputs per 8-K filing:
1.  Assumes reorg initial equity valuation of $1.149 billion ($100 million rights offering / 8.7%)
2.  Assumes strike price on warrants of $1.295 billion
3.  Warrants are sized to 6.0% of total newco equity
The table is showing what the warrant package being given to existing shareholders is worth under various assumptions for implied volatility. (Warrants are like an option: higher volatility in the potential values means that the warrants are worth more.)

The current market cap of GNK is $68 million, so a volatility of 200% would be needed for the stock price to be unchanged.

Volatility of the new equity is going to be dampened because the new company is going to have less leverage, at least initially.

I think a reasonable volatility assumption for a shipping company that's not in distress and has reasonable leverage is about 25%, i.e. about where SFL's near the money calls are priced.

That makes the Genco warrant package worth ~$15 million, or about a 30 cent stock price.

Note that there is a lot of wiggle room in all of these assumptions: initial reorg equity valuation, volatility, whether this plan is even the one that's confirmed.


Anonymous said...

any chance you could post the model (or more detail on the math behind it)?

Anonymous said...

Math behind it:

Anonymous said...

If the existing Genco shares get canceled in bankruptcy court, then all puts will get cashed settled and all calls will expire automatically.

The option contracts pertain to the existing Genco equity, not the New Genco Equity being issued.

The price of the New Genco Warrant only matters to shorts.

If you are short, you will need to buy New Genco Warrants OTC to close your short position.

It may also be that New Genco Warrant conditions get modified throughout the restructuring process.

Anonymous said...

Shorts closed large positions around 10-10:30am. Also, someone loading up on thousands OTM puts around the same time. There were good returns for the principal and liquidity, and timing risks, but things are coming back to normal now.

Also, a lot of dumb money thinks they will be receiving 6% equity in the 1.295 valuation. See the yahoo message board for GNK. The reality is that shareholders are getting wiped out and are being granted warrants to re-purchase Genco's new shares at a 10% premium to the valuation which the creditors have agreed upon.

The premium will add downward pressure on the volatility. Also, the multiple dilutions from the three, cashless MIP Warrants (each of which effectively is equity issuance by the company), willadd further downward pressure on the volatility. Maxim Group cut GNK from hold to sell and slashed it's price target to .25 cents today.

Anonymous said...

"If the existing Genco shares get canceled in bankruptcy court, then all puts will get cashed settled and all calls will expire automatically.

The option contracts pertain to the existing Genco equity, not the New Genco Equity being issued."

This is not true. See OCC Infomemo #27646 for a case study on how this will work... if the warrants are publicly traded, existing options will be adjusted so that the new underlying is the warrants. With a stock as widely held as this piece of crap the warrants most likely will be publicly traded.

Anonymous said...

"As of the Plan Effective Date, Reorganized Genco will be a reporting company under the Securities Exchange Act and the parties intend that Reorganized Genco will remain a reporting company under the Securities Exchange Act. In the event that, during the one-year period immediately following the Plan Effective Date, Reorganized Genco meets the applicable listing standards, then Reorganized Genco will use commercially reasonable efforts to cause the New Genco Equity to be listed on the New York Stock Exchange or the NASDAQ Stock Market within a reasonable time after the Plan Effective Date."

Anonymous said...

I wonder how much longer GNK will remain listed.

jHurt said...

My read is the $1,295 is the equity value, this is not same as enterprise value. To that I think you have to add another $350M:

· replacing the $253 Million Facility and $100 Million Facility with new senior secured credit facilities or amending the facilities to provide for extended maturity dates through August 2019 and certain other covenant modifications;

jHurt said...

Otherwise 9x 2015 ebitda ($180M), a figure expected to fall precipitously the following years. Need to look at the comps

Anonymous said...

1.295 billion is the strike price, not the equity value.

The market assigns the equity value, not an agreement.

If the warrants were worth $86.2 million (as priced by GNK's market cap as of close today), then the new equity value would need to be over 2.75 billion.

Anonymous said...

Comment on Genco Equity Shareholders To Be Virtually Wiped Out

"I have finally gotten around to reading how the deal has been reported in the press. Many outlets simply have it wrong. Existing shareholders will get a warrant struck at $1.295 billion for 6% of the company. Several news reports are suggesting existing shareholders will get an outright 6% of the company.

An outright 6 percent of the company at a $1.295 billion valuation equates to $1.76 a share, which is not to far off from todays close. Unfortunately for long GNK holders, this is not the deal.

The deal is they get a warrant, which requires a vastly different calculation. In order for today's closing price to make sense, the post restructured equity must be worth $2.717 billion [(1.94*44)/.06 + 1.295]. This ignores the time value of money. I doubt many analysts would think that valuation is credible.

The likely generous valuation would be 8x peak ebitda, or around 1.6 billion. The equivalent warrant value would be 6 percent of $1.6 -1.3 billion (.06 * 300) or $18 million. That equates to a current share price of around 40 cents."