Navios Maritime’s Proposed Equity Offering Is Credit Positive
Last Tuesday, Navios Maritime Partners L.P. (NMM, B3 stable), an international owner and operator of container and dry bulk vessels, announced that it will issue $100 million in additional common equity units to be sold to investors. The company will use the proceeds for general working capital purposes and acquiring new vessels. This is credit positive for NMM because the transaction will improve company’s liquidity and provide additional opportunities to accelerate revenue and profit growth via an expansion of its fleet capacity. NMM owns 24 dry bulk vessels with total capacity of 2.7 million dead weight tonnes (DWT) and seven containerships with a capacity of 50,800 twenty-foot equivalent units (TEUs). Market prices for the vessels have been low. According to Drewry Maritime Research, the value of second-hand dry bulk vessels were more than 30% lower in March 2017 than at the end of 2014, while the value of second-hand container ships was down more than 50% over the same period. We expect that the net proceeds of $95 million (post transaction costs) from the equity issuance will be sufficient to buy the company a significant increase in capacity, thereby improving cash flow. For example, the latest Drewry report indicated that the value of second-hand Capesize vessels (which normally have capacity around 170,000 DWT and compose 6% of NMM’s current dry bulk fleet) was $24 million. Every additional Capesize vessel that NMM acquires, therefore, would increase the company’s dry bulk fleet capacity by 5%-6%. Companies in this sector typically use secured vessel financing to acquire ships. Hence, the ultimate effect on NMM’s leverage will depend on the mix of equity/debt the company uses for its purchases and the charter rates that the acquired ships command. Because NMM’s term loan B has a loan-to-value covenant set at 0.8:1, with approximately 15% of headroom at the outset, we do not expect the company to target a more aggressive ratio than the covenant. In recent quarters, NMM has taken a series of actions to improve its liquidity and reduce leverage. The company refinanced its senior secured term loan due in 2018 with a new term loan due in 2022 to effectively push back the maturity. NMM management also suspended its dividend from the first quarter of 2016, at the trough of the dry bulk market. Credit quality also benefited from the sale of its largest container ship, MSC Christina. As a result, NMM reduced its debt by approximately $180 million between year-end 2015 and January 2017, and we changed NMM’s outlook to stable from negative in February this year. The potential equity issuance also indicates capital flows into the previously challenged dry bulk market and reflects a more positive view from the investor community. The Baltic Dry Index shown in the exhibit below tracks dry bulk freight rates, which recovered from historically low levels in the first quarter of 2016. However, we project supply growth outpacing demand growth by around 1.2% in the dry bulk sector this year, which may limit further recovery of the rates.
