Back in November of last year I contributed an article on Navios Maritime Acquisition (NNA), the crude and product tanker subsidiary of the Navios Maritime Holdings (NM) group, calling it dead money. The main points were that NNA has been perhaps irreversibly impacted by the reluctance of the product tanker market to start its recovery during 2011 and going into 2012, the fall in value of the VLCC crude tanker fleet and the related counterparty risk of the VLCC above-market charters; not only NNA was loss-making in GAAP terms, its cash flow was suspect as well.
The article generated a quite healthy discussion, the argument utilized by proponents of NNA being - and I may oversimplify here - "well, duh, NNA is supposed to be dead money, instead look out to 2013 and beyond - and the cash flow is there". So in essence we were in agreement about the perspectives for the stock.
Three months afterwards and a few days after the publication of NNA's Q4 and 2011 results is not really a time to revisit the issue. While NNA bowed to necessity and fixed a number of its new building vessels at quite modest rates for the next three years it also ordered another three MR product tankers for delivery in 2014 having a giddy 80% financing in place. This is further evidence that any recovery play can only be for 2014 and beyond.
However, NNA's results and related presentation provides an opportunity to explore a different aspect of the Navios group companies, that of spin. I took some time to compare some slides from the NNA Q4 presentation with the reported results, in good faith - and I simply see a different company based on the numbers.
All numbers relating to "spin" are taken from the company's Q4 presentation, referred to above. The related discussion and numbers is based on the financial statements included in the company's Q4 earnings release or linked SEC documents as the case may be.
Spin: Strong liquidity position with $73.5m of cash as at December 31, 2011
Reality: Negative effective cash position as at December 31, 2011
right click to enlarge images
NNA touts its strong cash and liquidity position of $73.5 and 130.1 million, respectively. Cash includes restricted cash of $29.5 million, as acknowledged in the slide. The remaining cash amount of about $44 million corresponds almost exactly to the management fees and other costs that NNA has not been paying and currently owes to Navios Holdings: according to NNA's Q4 balance sheet, a liability of $43.6 million is recorded as "due to related parties". Indeed, these are accrued management and opex fees and in fact Navios Holdings currently finances NNA with $43.6 million at 0%. Note here that this effective financing is separate and in addition to the fully drawn and outstanding $40 million loan from NM to NNA, as disclosed in the long-term liabilities section of the balance sheet.
In other words, NNA has a zero effective free cash position at year-end 2011. It is reasonable for the Navios Group to finance NNA not only through loans at market rates but also by accepting accrual of management fees at zero interest. In fact NNA should point out the positives resulting from the intergroup relationships (even if NM shareholders might be dismayed). But it appears cheeky to spin the cash position of NNA in a way creating the impression of ample liquidity. What is worse, not only does NNA deduct cash owed to NM for net debt purposes and ratios, the amount due to related parties is not considered as debt. This helps to schew the Net Debt/Capitalization ratio.
Finally, declared dividend is $2.5 million and accrued expenses, most of them accrued interest on NNA's 8,625% Notes due 2017 (interest on which is paid only semi-annually and as a result a lot of cash needs to be put on the side, at least notionally) and other credit facilities, stand at $15.5 million. Result? A negative $18 million effective free cash position and definitely nothing to brag about.
Spin: Cash flow cushion from low break even
Reality: Just about zero effective cash position projected at end 2012, income negative
In this remarkable slide, NNA projects its average daily cash costs at just above $20,384 per vessel per day in 2012. At the same time, on the left hand side, we see that the average contracted charter-out rate is calculated at $26,647 per day. But it is almost exasperating to have to point out that NNA includes its expected 2012 deliveries on the cost side but, conveniently, not on the revenue side: the new deliveries will earn, very generously, at most $15,000 per day, bringing the average daily charter rate even further down. The relevant slide as included in NNA's Q3 presentation (Slide 7 there) was even more misleading as it is now revealing: it showed average daily revenues for 2012 at a whopping $29,506. That was of course before the recent slew of fixings of the MR new buildings at $13,300 (base rate) which immediately brought down the average.
In the slide, the company projects a "surplus of revenue over cost" of about $21 million based on the current contract coverage. Even if the remaining 650 open days are indeed covered at, say, $15,000, the surplus of revenue over cost for 2012 would be at some $30 million.
This follows from a 2011 in which, after stripping accrued expenses and due to related party items, the underlying operating cash flow of the business was some $25 million - that's on an asset base averaging $1 billion for the year.
Noting that depreciation for 2011 was just above $38 million, noone is doubting that 2012 will be loss-making for NNA from a GAAP perspective.
But even focusing on cash, NNA needs to cover a $10 million annual dividend and find $57.5 million for capital expenditure in 2012 (restricted cash will be used there, of course), as mentioned in the Q4 presentation. At the end of 2012 NNA will remain in a very restricted effective cash position.
Spin: NNA is an efficient, low cost operator
Reality: It is Navios Holdings that eats any additional costs - and NNA is not paying at the moment anyway
First, the NNA shareholder should be happy that the Navios Holdings start-up tanker management subsidiary is willing to take on the risk of fixed management fees and opex. But what makes the statement in the slide truly grating is that NNA is not paying the management fees/opex to the related party company anyway. They are allowed to be accrued.
Accoridng to NNA's earnings releases, the accrued "due to related party" costs, which include management fees, opex and drydocking expenses, have developed as follows:
- Q1 2011: $7,106 million
- Q2 2011: $16,127 million
- Q3 2011: $29,272 million
- Q4 2011: $43,616 million
Management could even call NNA a zero cost operator - it would be true from a cash point of view.
Spin: Strong balance sheet
Reality: A very leveraged balance sheet subject to a variety of risks
I do not repeat here the arguments made in my initial article relating to the decrease in value of the VLCCs (hitting directly the shareholders equity line), the negative effective cash and double hidden leverage (not only does "cash" reduce net debt but accrued amounts owed to related party Navios Holdings are not included as debt) and the planned additional leverage for the 2012-2014 deliveries. Even with the numbers NNA elects to present, I am simply wondering whether it is reasonable for any company to declare a balance sheet at a close to 75% debt to capitalization as "strong". I really don't know.
Spin: Returning capital to shareholders
Reality: No spin here - since NNA does not actually make a profit, the dividend is really a return of capital - in addition, this is only possible because the banks waive the relevant restrictive covenants
NNA 's credit facilities effectively prohibit the payment of a dividend if NNA does not make a GAAP profit unless the relevant banks agree to such payment. For an example of such an facility, see here (and NNA investors confirmed in the comments of my first article that similar restrictions are included in other credit facilities). NNA does, in fact, pay a regular $0.05 quarterly dividend, presumably with the consent of its banks. It is not immediately obvious how NNA communicates to its shareholders that the current dividend is paid under a waiver. At least it has never been mentioned in any presentation.
Spin: We buy cheap vessels at the bottom of the cycle
Reality: Even allowing for capitalized interest and other delivery costs, the final purchase price of the NNA vessels tankers appears significantly higher than the initially announced one
This is an element I intend to explore further when NNA files its typically immaculate 20-F for 2011. My impression that NNA had struck a bargain at the time of its initial business combination in 2010 has been undermined by NNA's own filings.
From the 04/08/2010 press release announcing the product tanker deal:
Chemical Tanker 25,000 9/30/2010 $28.7 million
Chemical Tanker 25,000 11/30/2010 $28.7 million
However, in the SEC filings the costs go up quite a bit. From NNA's 2010 20-F: "On October 27, 2010, Navios Acquisition took delivery of the Nave Cosmos, a 25,130 dwt South Korean-built chemical tanker for a total cost of $31.8 million"; and from NNA's 6-K dated 11/15/2011: "On January 27, 2011, Navios Acquisition took delivery of a 25,145 dwt chemical tanker, the Nave Polaris, from a South Korean shipyard, for a total cost of $31.8 million".
That is a 10% difference between the announced purchase price and the total cost for the Cosmos and the Polaris. This difference may simply be a reflection of very high pre-delivery interest costs, since pre-deliver interest is capitalized - but 10%? I am now curious about the actual cost of the recent LR1 deliveries, the Andromeda and the Estella, acquired at an announced $40 million each. And if the 20-F shows again such a high added cost, one should also be suspicious about the bargain prices of the MR vessels.
Why Flog a Dead Horse?
I return to the NNA story because there are a number of other companies competing for investors' attention and money in the product tanker sector. During 2011 I looked closer at a number of companies in the crude and product tanker sectors after previously enjoying reading primarily the absurd statements and practices of listed dry-bulk operators. The Navios Group companies have been extremely successful in raising capital, in particular via the credit markets. Their strategies have been very transparent and comparatively forthright. NNA, for example, proposed at its inception a very clear and transparent strategic plan: to push its very high maturities as far as out as possible in order, in the meantime, to take advantage of the product tanker market upswing - which did not happen in 2011.
It is difficult now to see how NNA can survive without raising more equity - the spin in its press releases appear in stark contrast with the company's fundamentals. In fact, NM has been very clear about its intention to lower its economic holding in NNA. Investors should stay out until a secondary clears the picture or simply stay out and allocate their money elsewhere.
Torm A/S (TRMD) has collapsed under the weight of its charter-in commitments. Capital Product Partners (CPLP) reeks of corporate governance failings and employs the MLP/full payout policy that some investors like but means continuous secondary offerings (and to me, eventual assured decline). Tsakos Energy Navigation (TNP) has a nicely diversified fleet but also a very high debt level.
Scorpio Tankers (STNG), whose last presentation consisted of three slides, does not pay a dividend and does not do earnings conference calls, has also raised equity repeatedly. Its most recent and quite dilutive offering was intended to reduce the company's leverage to extremely low levels, pay for its own new building delivery programme during 2012 and charter-in cheap third-party tonnage. It is by far my preferred bet in this sector.
On the other hand, investors seem to like NNA's results. At least I hope they are not taken in by the presentations.
Disclosure: I am long STNG.