Navios Maritime Acquisition (NNA) is a member of the listed shipping empire led by its Chairman and CEO, Angeliki Frangou. Parent Navios Holdings (NM) has also sponsored dry-bulk distribution extraordinaire Navios Maritime Partners (NMM), with a dedicated South American product tanker, storage and inland barge operation expected to be spinned-off from NM when equity markets provide an opportunity.
A crude and product tanker owner, NNA's stock has been steadily declining since 2010 and has been hovering at less than $3.40 while paying a $0.05 quarterly dividend for a close to 6% yield. NNA trades at some 40% discount to its stated equity with little liquidity. With industry sources increasingly predicting a product tanker revival, investors may feel that NNA is a hidden gem. This is not the case.
Arriving with a bang
NNA was a blank check company or SPAC with cash to invest on the rebound from the 2008-2009 financial – and shipping – crisis. In light of Angeliki Frangou's previous achievements, a consummated business combination was virtually assured, even at a cost to the ensuing operating company. Indeed, despite a typical SPACmail process, in early 2010 NNA acquired a fleet of charter-free newbuilding product tankers and a couple of chemical tankers at low prices, almost all with very long forward delivery over 2012-2013, betting on higher future charter rates and therefore asset prices.
NNA immediately followed up with an acquisition of 7 VLCCs, all with above-market long-term charters. On the balance sheet front, NNA successfully tendered for the majority of the outstanding SPAC warrants, completed a follow-on offering of 6,500,000 shares at $5.50 and also issued, in total, $505 million of secured notes due 2017 at 8,625%, besides taking on some additional bank debt. In summer 2011 NNA acquired two MR2 tankers, already in the water, with above-market charters attached and also added another two LR1 newbuildings to its orderbook. (A comprehensive presentation of the company can be found in its Q3 results presentation here.)
Product tanker asset play slow to materialize while crude tanker values decline
Any asset strategy in shipping can easily go wrong if the timing is only just a little bit off (just ask General Maritime (GMR) which is being restructured after making a premature crude tanker asset play in 2010, only to have the vessels enter what turned into a below opex charter market).
NNA was initially pitched as an asset play. Even though the product tanker market has not suffered as much as larger crude tankers, it is still at quite low levels. In fact, asset prices remain subdued and at record low levels. NNA's bargain purchase prices remain still in-line with current newbuilding prices. But the actual price tag is higher, since NNA has already borrowed at very high rates to finance the vessels. So there is no real NNA advantage over other companies buying newbuildings right now.
At the same time, VLCC market values have plummeted and it is extremely unlikely that any recovery will be significant, especially for older units. NNA owns at least two VLCCs that would have faced age discrimination were they to be operated in the current spot market and appear destined for scrapping once their charters expire. All told, the market value of the 7-strong VLCC fleet should be below $420 million, far less than the original $587 million purchase price, even accounting for the value of the above-market charters. So there is a significant question mark with regard to NNA's stated book value. This leaves investors hanging on to cash-flows and the dividend.
Risky credit-driven strategy ensures continuing losses
Investors should be questioning the signature Navios group strategy, that of ignoring the bottom line in favor of aggressive growth, distribution growth, EBITDA or other metrics depending on the group entity. (Anecdotally, I can't remember any earnings release of a Navios group company actually focusing on earnings.) Like many other companies in the sector, NNA has not been making any money and is unlikely to be profitable even in 2012. NNA management has been stressing instead that its cash-flows already cover opex and debt service and there is cash left to “reward” the shareholders with a dividend, while they wait.
The Q3 results however, reported last week, confirm NNA's precarious financial position: In fact, cash-flows from operations came in at around $40m for the first 9 months of 2011. But if one backs out the $23 million of accrued management fees owed to NM and the $13 million of accrued expenses, which consist mainly of accrued interest on the 2017 notes, the cash-flows all but evaporate. Interest alone on the now more than $850 million debt load should reach an annual run-rate of $50 million, or some 40% or more of revenues.
What's more, in a sign that at least the LR1 product tanker market continues to suffer, NNA took back two of its LR1 vessels during the quarter against payment of compensation. These vessels, which had been earning $17,000 per day are now fixed at much lower levels - as were another two newbuilding LR1 vessels delivering in November and next January, And NNA's heavy exposure to COSCO, which only recently tried to renegotiate expensive charters in its dry-bulk segment, will begin to become very uncomfortable should VLCC rates remain at current depressed levels.
In the meantime, the company's stated equity to total assets ratio has decreased from 25% in the beginning of the year to 21% at the end of Q3 – and remember, the stated equity does not reflect current vessel values. Even so, while most of the equity for the 13 remaining newbuildings has been already paid, about $75 million of fresh money is required until the end of 2012. In view of negative earnings, little debt amortization because of the notes, continuing dividends and the impact of amortization of intangibles and depreciation, NNA's leverage is likely to go up further. Perhaps the price of the secured 2017 notes reflects best the quality of the equity:
Source – TRACE - NM.AF / CUSIP: 63938MAB2 – as of 10/11/2011
Perspectives - NNA is dead money
A turnaround in the product tanker market is now expected as from 2012 – pushed back from 2011. The orderbook appears generally more manageable than in the crude tanker segments and the demand for clean petroleum products is expected to continue to increase. Investors such as Wilbur Ross recently invested heavily in product tankers based on exactly this thesis.
Even assuming that such a scenario materializes, the question is whether NNA is able to take advantage of any potential upward trend. With minimal cash-flows, extremely high interest costs, debt that will reach over $900m in 2012 and naturally declining equity, NNA simply does not appear flexible enough. Any up-tick in the stock price should be seen as an opportunity for management to raise fresh equity – Navios Holdings has been very open that they want to reduce their 53% economic holding in NNA. And it is unlikely that they would be able to maintain a reasonable share count – the current count, from an economic perspective, is already 48,400,000.
The sector does not lack alternatives for investors subscribing to a product tanker revival.
Scorpio Tankers (STNG) came to market roughly at the same time as NNA, in spring 2010. Also loss-making, Scorpio is much more moderately leveraged. While also loss-making, almost all its owned and chartered-in tankers are operated in an affiliate pool and can easily profit from increasing rates. Tsakos Energy Navigation (TNP) and Capital Product Partners (CPLP) both resemble NNA in that they operate both crude and product tankers on longer term contracts, although CPLP should be avoided by those valuing corporate governance, even measured against shipping company standards. A nice play could also be D'Amico International Shipping, listed in Milan, with a good mix of owned and chartered-in vessels and trading at 40% of a market-based book value.
NNA's strategy has simply not worked as planned and it is doubtful that it will. In the meantime, the 6% dividend yield on the NNA stock is hardly worth the risk.
Disclosure: I am long STNG.