Navios Maritime Holdings Takes A Liquidity Blow As Its Affiliate Suspends Distributions

| About: Navios Maritime (NM)

Summary

Navios Maritime Holdings is suffering a severe liquidity crisis due to the collapse in Dry Bulk charter rates.

Navios Maritime Holdings owns 20.1% of Navios Maritime Partners through General Partner and Limited Partner Units.

Navios Maritime Holdings forecasted unit distributions of $14.5 million from Navios Maritime Partners.

Navios Maritime Partners suspended its distributions Wednesday, February 3rd, as it released quarterly earnings.

I have recently written three articles that provided an in-depth examination of the severe liquidity crisis confronted by Navios Maritime Holdings (NYSE:NM). This morning an affiliate of NM, Navios Maritime Partners (NYSE:NMM), released 4Q and Year Ended December 31, 2015 earnings and simultaneously announced that it was suspending its unit distributions. NM owns 20.1% of Navios Maritime Partners through General Partner and Limited Partner units. In its Q3 2015 Earnings Presentation on page 8, NM forecasted that it would receive $14.5 million in distributions from NMM.

The suspension of the distribution by NMM has three impacts on NM:

  • A reduction in future cash flow and a worsening of its liquidity crisis.
  • A reduction in the value of assets that may be sold to fund NM's cash flow short fall.
  • A possible triggering of contingent liabilities under the Charter Guarantee provided by NM to NMM.

Cash Flow Impact

In my article entitled "Navios Maritime: Liquidity Issues Will Continue to Worsen During 2016", I forecasted cash flow for the Dry Bulk operations of NM through June 30, 2016. This forecast included the expected distributions from NMM in the cash flow roll forward for Q1 and Q2 of 2016. I have reposted the original analysis below. It is important to review the assumptions included in the referenced article, particularly the optimistic assumptions regarding charter renewals.

Navios Maritime Holdings

Dry Bulk Segment

Qtr Ending 12/31/15

Qtr Ending 3/31/16

Qtr Ending 6/30/16

Adjusted Net <Loss> 3rd Qtr

-45,682

-35,930

-28,002

Charters-out Renewal Benefit

2,806

-748

0

Bunker Fuel Price Decline (1)

6,946

8,677

(5,694)

Estimated Net <loss> Curr. QTR

-35,930

-28,002

-33,696

Depreciation & Amort

20,870

20870

20870

Dividends from Affiliates

7,283

7,283

7283

CapEx

-5,000

-15000

-5000

Preferred Dividends

-3,675

-3,675

-3675

Credit Facility Debt Pmts

-3,275

-3,275

-3275

Drawdown Euro I & II Revolv

-1,000

-2,500

-2500

Cash Flow

-20,727

-24,299

-19,993

Beginning Cash

86,000

65,273

40,974

Estmated Cash at Period End

65,273

40,974

20,981

Click to enlarge

As detailed in the table, Estimated Cash at Period End for June 30, 2016 for the Dry Bulk segment of NM was $20.98 million. Below is the revised table that reflects the suspension of distributions from NMM on the line entitled "Dividends from Affiliates".

Dry Bulk Segment

Qtr Ending 12/31/15

Qtr Ending 3/31/16

Qtr Ending 6/30/16

Adjusted Net <Loss> 3rd Qtr

-45,682

-35,930

-28,002

Charters-out Renewal Benefit

2,806

-748

0

Bunker Fuel Price Decline (1)

6,946

8,677

(5,694)

Estimated Net <loss> Curr. QTR

-35,930

-28,002

-33,696

Depreciation & Amort

20,870

20870

20870

Dividends from Affiliates

7,283

3,650

3650

CapEx

-5,000

-15000

-5000

Preferred Dividends

-3,675

-3,675

-3675

Credit Facility Debt Pmts

-3,275

-3,275

-3275

Drawdown Euro I & II Revolv

-1,000

-2,500

-2500

Cash Flow

-20,727

-27,932

-23,626

Beginning Cash

86,000

65,273

37,341

Estmated Cash at Period End

65,273

37,341

13,715

Click to enlarge

As detailed in this revised table, Estimated Cash at June 30, 2016 declines to $13.71 million, a decrease of $7.16 million. The suspension of distributions by NMM exacerbates NM's already parlous condition. The forecasted June 30th cash balance would be woefully insufficient to operate the company and Management will restructure or file for bankruptcy long before this date.

Value of NM's Investment in NMM

NM's stake in NMM is currently unmarketable to retail investors or yield oriented institutional investors due to the suspension of distributions. Given the surprise nature of the distribution suspension and the uncertainty engendered by this action, I question NM's ability to find a willing purchaser for the GP and LP interests over the next several months. If such a sale were possible, it would likely need to be at a significant discount to the post announcement market price. The NMM GP and LP units will therefore not be a source of funds for NM Management as it tries to address its liquidity crisis.

Charter Guarantee Liability

The suspension of unit distributions by NMM was a surprise since, even assuming a possible bankruptcy by NM and the rejection of charters by NM on vessels from NMM (a negative for NMM), there should have been sufficient medium to long-term support in the NMM charter portfolio to continue to maintain the distribution. The management conference call to discuss earnings and the distribution suspension will be held Wednesday at 8:30 am eastern. They will likely emphasize the lack of access to capital and the preservation of cash flow for future growth opportunities as they did in the news release, but it will be important to see if there is any mention of counter party risk amongst its portfolio of charters-out.

If NMM gives any hints it is concerned about counter party risk (i.e. entities chartering vessels from NMM going bankrupt and rejecting the charters since they have rates in excess of current market rates), this could be a concern for NM also. As discussed in this article, NM provides charter guarantees for some of the vessels on medium and long-term charters that it "dropped down" into NMM. If the counter parties default on their charter obligations, NM would need to pay NMM under the charter guarantees it provided. The charter guarantee by NM was limited to $20 million and a bit of $1 million has been paid out to date leaving a remaining liability of $18 plus million. As the cash flow forecast above illustrates, NM does not have the liquidity to fund such a liability.

Conclusion: Angliki Frangou's actions at NMM make sense when considered within the context of the unprecedented downturn in the Dry Bulk market. It is better to assume the worst, batten down the hatches, and preserve every dollar possible. Investors should expect similar actions at the far more troubled parent, NM. My advice to management is suspend future preferred dividend payments, suspend principal and interest payments on all debt (Credit Facilities, Mortgage Notes, Senior Notes), do not renew expiring charters-in vessels, stop dabbling in the short-term charters-in market, and get down to the business of negotiating a reorg of the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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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