Capital Product Partners L.P. (CPLP) CEO Jerry Kalogiratos on Q1 2016 Results - Earnings Call Transcript

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Capital Product Partners (NASDAQ:CPLP)

Q1 2016 Results Earnings Conference Call

April 26, 2016, 09:00 AM ET

Executives

Jerry Kalogiratos - Chief Executive Officer, Chief Financial Officer and Director

Analysts

Michael Webber - Wells Fargo

Amit Mehrotra - Deutsche Bank

Jon Chappell - Evercore Partners

Spiro Dounis - UBS

Mike Gyure - Janney Montgomery Scott

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Capital Product Partners first quarter 2016 financial results conference call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer and Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you the conference is being recorded today, 26th of April, 2016.

The statements in today’s conference call that are not historical facts, including cash generation, Capital Product Partners’ ability to repay external debt, future earnings expectations regarding employment of vessels, redelivery dates and charter fleets, charter rates, fleet growth as well as market and charter rate expectations, charterers’ performance, and expectations or objectives regarding future distribution amounts, Capital Product Partners’ ability to pursue growth opportunities, and gross distribution and annual distribution guidance are forward-looking statements such as defined in Section 21E of the Securities Exchange Act of 1934, as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations, to conform to actual results or otherwise.

We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the future of our common units.

I’d now like to hand over to your speaker today, Mr. Kalogiratos.

Jerry Kalogiratos

Thank you, Jamie, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our Web site as we go through today’s presentation.

Our Board of Directors declared earlier today a cash distribution of $0.075 per common unit and $0.21375 per Class B unit for the first quarter of 2016. The first quarter common unit cash distribution will be paid on May 13 to unitholders of record on May 6. The first quarter Class B cash distribution will be paid on May 10 to Class B unitholders of record on May 3. Unit coverage for the quarter amounted to 1.7 times after establishing a 14.6 million in quarterly capital reserves.

During the quarter, we were approached by Hyundai Merchant Marine, or HMM, who requested in the context of their restructuring plan the reduction of the charter hire rate of the five vessels that are currently employed with HMM. As you know from the press and from HMM’s own disclosures, the company has been facing severe financial and liquidity problems due to the protracted slump of the drybulk and container markets. It is seeking therefore to complete a restructuring which was put together with the help of its key financial creditors that would involve a number of its creditors receiving a haircut.

In this context, HMM has approached its owners/providers, including CPLP, for a temporary charter rate reduction. I cannot disclose further details due to the confidential nature of these discussions. However, you appreciate that this is a complex and time-consuming process, which requires the consent of a number of stakeholders. We are not in a position, at this point, to appraise whether HHM will be successful in its restructuring plan and whether it will manage to secure the consent of the stakeholders involved.

Moving on, the partnership’s net income for the first quarter stood at 12.1 million, in line with net income recorded in the first quarter of 2015. During the first quarter of 2016, we drydocked two of our vessels, namely the motor tanker Anemos and motor tanker Alkiviadis.

In February, the partnership took delivery of the motor vessel CMA CGM Magdalena, the last of the five drop-down vessels that we have agreed to acquire from our sponsor, Capital Maritime. The vessel commences five-year charter with CMA CGM upon delivery.

Moreover, during the quarter, the partnership secured employment for the two container vessels, Agamemnon and Archimidis, with PIL – Pacific International Lines, that is – for 12 months with charterers having the option to extend the employment by another 12 months at an increased rate. As a result of the new charters and the delivery of the CMA CGM Magdalena, at the end of the first quarter 2016, the average remaining charter duration of our charters stood at 6.2 years with approximate charter coverage of circa 92% for 2016 and 73% for 2017. This includes the HHM charters.

Turning to slide three, our Board announced earlier today the creation of a capital reserve, a related reduction in available cash, and the resetting of the common unit distribution on a new sustainable path. The common unit distribution for this quarter was set at $0.075 and the new annual distribution guidance at $0.30.

I would like to stress that based on contracted earnings, we currently do not expect distributions to be lower than the distribution level on an annual basis through the end of 2018.

Over the last few quarters, the partnership has experienced a significant deterioration in the trading price of its common units and, as a result, a sharp increase in its cost of capital. This deterioration has occurred against a backdrop of a severe debt and equity market pricing dislocation for a number of publicly traded MLPs. In practice, this means that our ability to access capital markets is now severely restricted.

In the context of currently high capital cost for the partnership, as you can see on the amortization schedule on slide three, one of our credit facilities started amortizing in the first quarter of 2016, while our three other facilities started amortizing in the fourth quarter of 2017. As a result, we are due to repay approximately 175.7 million of debt between the first quarter of 2016 and the end of 2018.

In the past, we successfully managed to extend the non-amortizing periods and the maturities under our credit facilities which is not possible today. Our unit price would need to almost treble in value relative to where it has traded over the last few months for us to tap, for example, equity markets in a cost-effective manner and at levels similar to most of our past fundraisings.

In addition, it was important for us to act sooner than later in order to start building the cash reserves required to service our debt whose amortization accelerates from the end of 2017 onwards. If we were to delay the decision further, we would have needed to reduce the distribution to a greater extent. In light of the circumstances, our Board decided to put aside 14.6 million on a quarterly basis in the form of capital reserves to fully provide for the debt repayments coming due in the next three years up until the end of 2018.

We expect that the revised annual distribution level will allow us to fund our amortization payments for 2016, 2017 and 2018 with internally-generated cash flows, without the need to access capital markets, and would leave us with pro forma outstanding debt of 431 million as of the end of 2018, which we believe should provide us with ample flexibility to refinance our debt and extend the maturities of our credit facilities.

It is important also to stress that we expect the new distribution level to be sustainable even if the attempted restructuring of HMM is unsuccessful. As I mentioned earlier, we’re not in a position at this point to appraise whether HHM will be successful in its restructuring plan and whether they will manage to secure the consent of the stakeholders required. We know, however, that many outcomes are likely with regard to HMM. Thus we felt it was important to set a distribution level that would provide for the costs associated with HMM redelivering all five vessels to us and having to employ them in the current, very depressed container market.

As our 5000 TEU [indiscernible] eco-container vessels, our modern assets which are considered among the most popular designs of this type, we expect that we would be potentially able to fix these vessels at a premium to the current market if we were prepared to commit for longer time periods.

Of course, this will not happen overnight as finding new employment for five ships would almost certainly entail idle time in certain adverse scenario. Thus, our Board acted in a conservative and prudent manner by setting the annual distribution guidance at $0.30 per common unit. From here onwards, we believe that our level of distributions could improve in a number of circumstances such as improved access to capital markets from the partnership if we are successful in refinancing our debt obligations in the coming years under favorable terms or by completing accretive acquisitions and increasing our long-term distributable cash flow.

Turning to slide four, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press lease. We have generated approximately the 32.8 million in cash from operations before accounting for the Class B preferred units distributions and a capital reserve of 14.6 million. After adjusting for the reserve and the Class B unit distributions, the adjusted operating surplus amounted to 15.4 million. Common unit coverage for the first quarter was at 1.7 times.

Turning to slide five, the partnership’s net income for the first quarter of 2016 was 12.1 million compared to 12.2 million in the first quarter of 2015. The effect of the increased fleet size with the partnership and increase day rates for certain of our vessels was mostly offset by two of our container vessels being idle during the quarter and higher interest expense and finance costs. We had two vessels that had drydocked in the first quarter and we expect another two of our Suezmaxes to complete their drydock in the second quarter of 2016.

On slide six, you can see the details of our balance sheet. As of the end of the first quarter, the partner’s capital amounted to 918 million, which is 19.8 million lower than the partner’s capital at the year-end 2015. This decrease primarily reflects distributions declared unpaid during the first quarter of 2016, partially offset by net income for the period.

Please note that under new accounting rules, we present our debt, net of unamortized debt issuance costs, which were previously presented as an asset under deferred charges. Therefore, total outstanding debt as of the end of the second quarter is 602.4 million, less 3.6 million in deferred loan issuance costs, compared to total debt of 571.6 million at the end of 2015. The increase was due to the 35 million drawdown under one of our credit facilities to fund the acquisition of the CMA CGM Magdalena, partially offset by 4.2 million of scheduled loan principal payments during the first quarter of 2016 under the same credit facility.

Overall, our balance sheet remains strong with a net debt to capitalization of 35.7% and with partner’s capital representing 58.8% of our total assets. As announced earlier today, our Board decided to set a quarterly capital reserve of 14.6 million until the end of 2018 which is earmarked for the repayment of 175.7 million of debt in the same time period. This result will be covered with internally generated cash flows and should preserve the strength of our balance sheet going forward.

Turning to slide seven, as previously announced, we have secured new time charter employment for the Motor Vessel Agamemnon and Motor Vessel Archimidis with PIL. As reported in the markets, the charter rate for the first 12 months is 8,950 per day and the charterers have an option to extend the charter for an additional 12 months at $20,000 per day, which should allow us to capitalize on a potential market recovery into 2017.

During the quarter, we also took delivery of the CMA CGM Magdalena, the last of the five drop-down vessels that we have agreed to acquire from our sponsor. Upon delivery, in late February, the vessel commenced its five-year charter with CMA CGM at a gross daily charter rate of 39,250 per day.

It is also important to note that over the last few quarters, the partnership has substantially increased its customer diversification and reduced its exposure to Capital Maritime. Putting this into perspective, the number of vessels employed to Capital Maritime have decreased to five out of a fleet of 35 ships, while at the end of the first quarter of 2015 12 of our vessels were employed with Capital Maritime out of a total fleet of 31.

However, Capital Maritime continues to be one of our important charterers and, as a courtesy, it provides every six months with certain balance sheet information to help investors assess its financial profile.

Capital Maritime is a diversified, profitable shipping company which owns six VLCCs and one Suezmax crude tanker, four product tankers, two handy bulk carriers, and one feeder container vessel with an average age of less than five years. The company boasts of a strong balance sheet with low leverage and with a net debt to the market value of its assets at year-end 2015 of about 13%. At the end of 2015, total assets amounted to 1 billion and stockholders’ equity stood at approximately 75% of the total assets.

Moreover, Capital Maritime has an extensive newbuilding program in place which comprises five eco-MR product tankers, four eco-Aframax crude tankers and one feeder container to be delivered between the second quarter of 2016 and the first quarter of 2017.

Capital Maritime has secured or is in the process of securing debt financing for its newbuilding program and the equity is funded with cash from its balance sheet.

At this point, I would like to remind you that we have been granted the right of first refusal on eight eco-MR product tankers which are currently controlled by Capital Maritime. The credit facility for the financing of five of these vessels has been secured which provides for the potential drop-down of any of these five MRs to CPLP at a 50% loan to value and two years non-amortizing debt provided that the vessels have employment for two years or longer.

Moving to slide eight and taking into account the new charters, the average remaining charter duration is 6.2 years. We have five product tankers and two Suezmax tankers that will see their present charters expire over the next 12 months. We expect to continue to take advantage of the attractive fundamentals of the product and crude tanker anchor market to secure favorable period employment for these vessels.

Moving to slide nine, sentiment in the container market remains weak as rates remained in the first quarter of 2016 at subdued levels. The end of the fourth quarter 2015 witnessed an unprecedented low charter activity for post-Panamax container vessels due to the collapse of freight rates, but the first quarter 2016 saw fixture activity return at more normal levels. However, the large idle post-Panamax fleet did not allow the increased charter activity to translate into higher charter rates and, as a result, a number of fixtures took place at OpEx related levels.

The increase in charter activity was driven predominantly by operators opting for economies of scale as liner companies replace smaller vessels with larger post-Panamax vessels at historically low levels.

The rise in cargo bookings on the Asia-Europe and the Asia-USA route at the beginning of the year failed to materialize into sustained recovery due to the timing of the Lunar New Year holiday in Asia. Similar to last year, the Europe-North America trade as well as imports into the India subcontinent and the Middle East are showing positive growth figures. Overall, analyst expectation for demand growth in 2016 have been revised to 4.1%, while the supply of vessels is expected to increase by 3.9%.

The order book, compared to the current container fleet, stands at 18% which is the lowest in percentage terms since 2003. At the same time, the container market is experiencing high demolition activity with 105,000 TEU removed from the fleet in the first quarter of 2016 with an average age of 19.7 years, which actually accounts for approximately 54% of the demolition levels for the full-year 2015.

According to market reports, a 6500 TEU container vessel built in 2001 was demolished in March 2016, which is the largest ever container vessel to be scrapped in terms of capacity. This is representative of the more general trend of larger and younger vessels exiting the fleet, which bodes well for the long-term fundamentals of the container industry.

Finally, the ordering of container vessels has almost come to a complete standstill with only specialized feeder tonnage being discussed presently, while newbuilding slippage is on the rise.

Turning to slide ten where we review the product tanker market development in the first quarter of 2016. AMR product tanker spot rates were on average softer in the first three months of the year compared to the previous quarter. Relatively warm weather for this time of the year, along with high product inventories, negatively affected demand.

Adding to the negative sentiment, the spring refinery maintenance peak shifted to February/March from the more usual April/May period as unusually strong margins last year prompted many refineries to push back planned maintenance, which eventually took place in the first quarter of 2016.

The product tanker period market was active during the first quarter with rates remaining close to historical average rates, but overall weaker when compared to the previous quarter. Favorable demand and supply dynamics are expected to support period rates and activity going forward as product tanker deadweight demand is projected to grow by 3.7% in 2016 supported by long-haul product exports from the Middle East and Gulf as well as exports from teapot refineries.

At the same time, new contracting activity has been limited with only three new MR orders placed year-to-date due to the negative sentiment prevailing in other shipping sectors, such as in the drybulk and offshore markets, at a time of limited access to capital for the industry as a whole. As a result, the order book for MR tankers has declined substantially and currently stands at approximately 13% of the current fleet.

Turning to slide 11, the Suezmax crude tanker market was weaker in the first quarter of 2016 as rates retreated from the seasonably high levels experienced during the previous quarter. Softer demand resulting from refinery maintenance and relatively warmer weather conditions weighed on the market. On the other hand, Chinese demand for crude imports was solid, with imports to the country rising to new record levels, partially offsetting weaker demands in other regions.

It is estimated that Chinese seaborne crude imports increased 12% year-on-year in the first quarter of 2016 on the back of growth in crude imports from so-called teapot refineries. As a result of the softer spot market, we saw lower period activity for Suezmax tankers during the quarter, while period rates retreated accordingly.

According to the IEA, world oil demand is expected to increase by 1.2 million barrels in 2016 following growth of 1.8 million barrels in 2015. Overall, industry analysts expect Suezmax tanker deadweight demand to expand by 3%. This is largely on the back of the reemergence of Iranian crude exports to Europe following the removal of nuclear related sanctions in January. Furthermore, Chinese seaborne crude imports are expected to rise by 8% year-on-year, while US seaborne crude imports are projected to increase 5% this year, the first annual rise since 2010 as shale oil production falls.

The Suezmax tanker order book through 2018 corresponds to 23% of the current fleet. Nevertheless, contracting activity has declined sharply with just four Suezmaxes ordered year-to-date, a sharp contrast to the 19 vessels ordered in the same time period last year.

At this point, I would like to once again reiterate that today we aim to ensure that the partnership remains on sustainable path with a new distribution guidance of $0.30 per year, while at the same time preserving the strength and flexibility of our balance sheet. We expect that if our access to capital markets improve over time and we’re able to refinance our external borrowing or complete accretive acquisitions, we will revisit our distribution policy.

And with that, I’m happy to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you very much indeed. [Operator Instructions] And your first question from Wells Fargo comes from the line of Mike Webber. And your line is now open, sir.

Mike Webber

Hi. Good morning, guys. How are you?

Jerry Kalogiratos

Hi.

Mike Webber

Jerry, obviously, tough quarter and a tough decision. Obviously, I’m going to start with the dividend cut. You mentioned some eventual resolution of what’s happening with HMM and the capital markets could obviously look very different in the next three years than they have over the past 12 months. So I’m just curious, as it pertains to the cash that you guys will be building in terms of the reserves, would the priority be, if we get some sort of resolution to HMM and the capital markets open up, would you refresh the dividend kind of in arrears prior to looking at the drop-downs that you mentioned in the debt with capital. I know that’s a long ways out, but I think people that are sticking with the story would kind of be looking at that cash making, if the market improves, is that going to come back to us first?

Jerry Kalogiratos

Thank you, Mike. Cash reserves are built, as announced, for the amortization of our external borrowing for the next two years, so an aggregate of 175.7 million and, of course, contingency expenditures related to HHM and operations.

Now, if we’re able to refinance our external borrowings on favorable terms, we shall revisit our very conservative capital reserves policy and that could potentially lead to a revision of distribution going forward. And any additional cash that – if the expenditures related to HMM, for example, prove more benign, then we will potentially look at using that cash to acquire assets and grow the distribution as we grow our long-term distributable cash flow.

I think the first priority and I think what could lead to revisiting the distribution upwards also in the short term is refinancing our debt under favorable terms because that could potentially free up cash reserves that we are building very conservatively today.

Mike Webber

Right, right. And I guess that’s what I’m getting at that you guys are obviously not the first company to address their dividend [indiscernible] difficult capital market environment. Again, relative to the drop-downs, you would prioritize readdressing distribution policies in the event that things get better prior to looking at the drop downs?

Jerry Kalogiratos

I think it’s important to establish what the terms of the refinancing would be and if this will happen. But if it’s a long-term refinancing that would give us visibility, then we can very quickly revisit the distribution upwards. But I think that’s how we will think about that. Any excess cash on top of that we can potentially use for acquisitions.

Mike Webber

Okay. Obviously, long way down the road, but kind of important to touch on. I guess with regards to Asia now, I know there’s only so much you can get into now, but in terms of maybe laying out a timeframe for us to think about and when we could see some sort of resolution there, what’s your latest thought on when we could see some sort of definitive resolution there?

Jerry Kalogiratos

Well, as you know, we are bound by an NDA that restricts our discussion around HMM and any ongoing negotiations and, therefore, I can only discuss what’s in the public domain. And I would generally appreciate your patience as this matter may take some time to resolve and it depends on many different parties reaching an agreement.

As you know from the press, HMM has started a restructuring process and that involves a number of creditors. And in the end, they have to get consent from all these guys. We are not really in a position to appraise whether HMM would be successful, and I’m not sure whether I can commit to a specific timeline. Again, this is something that’s beyond our control. You read with what the company, HMM, comes out in the press and really there has been a lot of contradictory news flow from for Korea on almost a weekly basis. The company effectively, from what we understand, again, from the public disclosures, is in technical default area. As we speak, they have failed to pay a bond which is currently outstanding. So we had to make sure that the new distribution level is sustainable and could cover costs associated with the worst HMM scenario.

Mike Webber

Okay. No, that makes sense. Just a couple more and I’ll turn it over. In the past, the parent has played a role in terms of supporting the distribution, obviously not – if memory serves – not something quite as significant as this many charters at this kind of rate, but do you foresee down the line the parent playing a role in terms of making up any sort of gap or supporting the distribution going forward? I guess what’s been the stance of the parent in this scenario?

Jerry Kalogiratos

The point of the new distribution is that it’s visible to everyone, that this is sustainable in the long term and really under any likely HMM scenario, be it within a restructuring or not. So I think you and the investment community would like to know that the company is able to repay its debt and continue going forward without access to capital markets and without needing the support from third parties. Having said that, Capital Maritime is our largest holder and it does provide charter coverage from time to time in segments that are – they are already quite active such as the product tanker or the crude tanker markets. There is not much that they can do on the container side. As you know, on the container side, it’s a logistics business that Capital Maritime simply does not have. But I think throughout the last two years, Capital Maritime has been supportive of its investments. So we would expect this to continue going forward.

Mike Webber

Okay, that’s fair. One more and I’ll turn it over and you have to forgive me because [indiscernible] allowance for doubtful accounts or anything along those lines and it could be just that I missed it on my BlackBerry. But are they actually currents or is there an actual allowance within your P&L right now for the fact that, I guess, revenue and arrears may or may not be coming into the restructuring?

Jerry Kalogiratos

No such allowance has been made in our P&L because we don’t really know the outcome of the whole HMM discussion. But what I can tell you is that HMM is currently about, on average, let’s say, two weeks behind on hire payments.

Mike Webber

Okay. That’s helpful. All right, I’ll turn it over. Thank you, Jerry, for your time.

Jerry Kalogiratos

Thank you, Mike.

Operator

Thank you very much, sir. Now from Deutsche Bank, your next question comes from the line of Amit Mehrotra. And your line is now open, sir.

Amit Mehrotra

Thank you very much. Hi, Jerry. The coverage of 1.7 times after the capital – the new capital reserve, can you just give us a sense of how you expect that to trend? The upcoming tanker rechartering should be at least neutral, maybe even slightly accretive. The next container ship recharterings are not until after the first quarter of next year. I guess the only negative point would be HMM, whatever that impact is and the two recent containership recharterings. Just want to see if that’s a fair characterization and if you can offer any color on maybe the prospective movements in the coverage from here.

Jerry Kalogiratos

Well, really the coverage going forward will depend on what happens with HMM. As you say, when it comes to the other underlying markets, be it product or Suezmaxes, while they have come off compared to the previous quarter, they are still very close to average rates or close to where they are currently employed. And the two container vessels will be delivered to their new charterer. Actually, the one vessel has been already delivered. The other one will be delivered very soon. So, really, the coverage going forward will depend on HMM. But I think, as I said earlier and during the call, what we wanted to make sure is that we should set a distribution level that would provide for any costs or lower revenues associated with HMM even if they had to redeliver all five vessels to us and we had to employ the vessels in the current, very depressed market. So, again, we would expect that our coverage – and, of course, subject to our other underlying markets – would be about one.

Amit Mehrotra

Is there any update on the HMM? Obviously, you can’t offer an update. But what I’m really asking is that, if you look from an incremental basis, there has been a lot of developments at HMM. They sold their securities business for more money than they expected to. They seem to have gotten a little bit more relief from their creditors, albeit it might just be timing. Can you just offer some color in terms of – has anything changed with respect to your insights into how that’s going over – like the last month or so?

Jerry Kalogiratos

I cannot say that much has changed. The process continues and a lot of information is out there in the public domain. But as you know, and I’m sure this is also in your mind, we maintained the distribution at the same level last quarter, although, of course, the HMM issue was not as obvious at the time. And when it came to revisiting the distribution and the distribution guidance, this time around, I can reassure you it was not taken lightly by the Board. But we had to weigh a number of factors. HMM’s restructuring is a complex and time-consuming process that requires the consent of many stakeholders with different agendas. You have seen, as I mentioned earlier, contradictory news flow out of Korea. And really, the company is technical default area. And to the extent that I understand this correctly, while discussions with creditors as reported are going well, if a bondholder wanted to trigger a cross default, they could. So what I’m trying to say is that it’s not really on our position to assess what could happen or what will happen with regard to HMM.

Amit Mehrotra

Let me just ask you one--

Jerry Kalogiratos

If I may, just a couple of things. But if you look at the overall collapse of the container market, you have one victim, HMM, and at the same time, as you know, we recently had to fix two of our 8000 TEUs at very low levels after almost five months of the vessels remaining idle. This eroded into our unit coverage buildup for 2016 and beyond, which could have helped us to build up reserves in the face of HMM.

And last, but not least, you cannot disregard our cost of equity over the last few months. It has been north of 15% for almost five months and it has approached at times 30%, while debt capital markets have been adversely affected by developments in the energy space as well as other shipping segments. So this is all happening, HMM, the collapse of the container market, at a time that we need to think about our debt amortization.

So as long as we cannot tap capital markets in a cost-effective way, delaying the decision as to how to tackle our debt amortization, when at the same time we’re expecting substantial loss of revenues from HMM would have been irresponsible because we have successfully managed to extend these non-amortizing periods, as you know, and the maturities of our credit facilities. But, today, we would have to see our unit price more than treble.

Amit Mehrotra

I get the math. Let me just ask one more and I apologize to the other analysts, but let me just ask one quick one with respect to the distribution cut and the implications that has on the ability to generate basically internally-generated flash low. And the numbers – I’m going to run a couple of numbers by you, Jerry. Hopefully, you can sort of help me out in terms of how I’m thinking about it. But last year, the partnership paid a little over $120 million in distributions. Today, 70% cut. Basically, saves you 85 million a year. Over three years, that’s 260 million or so, of which 175 million is earmarked for debt repayment. So that leaves you about 80 million of net cash cumulatively through 2018 or 160 million on a leverage basis. Is that 160 million sort of how you are thinking about what the company’s firepower or cushion is cumulatively over the next three years? Is that in the ballpark for the reserves of the company?

Jerry Kalogiratos

Well, you have to tell me what will be the HMM outcome, so that I can tell you the actual number. But that would be – effectively, what you’re asking, if that’s really on a pro forma basis. And your math sounds right. I will be happy to take this offline. But that’s without taking into account any impact from HMM.

Amit Mehrotra

Okay, great. Thank you so much. I appreciate that. Good luck.

Jerry Kalogiratos

Thank you, Amit.

Operator

Thank you very much indeed. And now your next question from Evercore comes from the line of Jon Chappell. And your line is now open, sir.

Jon Chappell

Thank you. Hi, Jerry.

Jerry Kalogiratos

Hi, Jon.

Jon Chappell

Just one follow-up, maybe in a couple of parts. You mentioned the capital fleet and capital structure and also you mentioned again the right of first refusal. But it seems that, maybe despite all the firepower that Amit just walked us through, maybe growth should be put on the back burner right now as you kind of prepare for the debt amortization as well as what may happen or may not happen with HMM. So the question is basically, is that a fair characterization? Is growth and drop-downs essentially on the back burner until there is more clarity going forward? And second of all, when do those rights of first refusal expire? Or are they kind of in perpetuity as long as the duration of the contracts is in excess of five years?

Jerry Kalogiratos

No, you’re right, Jon. I think the Board took a conservative decision to prioritize the balance sheet at a time that capital markets are really dislocated and we have no access to that and at the same time we have the impact of HMM and the wider container market. And we understand that, in this environment, many investors prioritize a strong balance sheet and prudent management.

However, to your question, if a number of things happened, if, for example, our access to capital markets improved and we are successful in refinancing our debt obligations, that could free up cash. We could in that case revisit our capital reserve policy and simply increase the distribution on the back of that.

In addition, excess cash which if, for example, HMM proves to be more benign, could be used to acquire new assets such as the product tankers that I mentioned or other assets that Capital Maritime or the second-hand markets offers and start growing again.

What we have, and I think not many peers can boast of, is a strong balance sheet with no contracted CapEx. And the Board decided that this is, if you want, the asset that we have to prioritize at this point when markets are closed and we have the overall turbulence. As soon as things improve, and as I said this could also happen in the short term, for example, if we found a way to refinance our debt under favorable terms, so we could revisit the distribution as well as growth prospects.

Now, with regard to the right of first refusal, the way this works is that if Capital Maritime gets an offer to sell those vessels, then they have to give us the right of first refusal. So, really, it’s in place until there is a potential sale of these vessels.

Jon Chappell

Okay, that makes sense. And then just you mentioned a couple of times, one of the things that could change your ability to refinance some of your facilities, from what it sounds like from our conversations not just with the capital market participants, but also traditional bank lending, it seems like it’s far more difficult today to pull something like that off, which is, obviously, one of the reasons why you made the distribution cut. But, realistically, given the kind of outlook for the containership market right now, given how difficult financing is, is that a realistic alternative, in your mind, in the next two years to be able to significantly refinance the facilities to the extent where you could potentially change the distribution on the back of that alone?

Jerry Kalogiratos

I think we are fortunate to enjoy an excellent relationship with our banks and we have come to an understanding that if we were to prepay our banks, they would be willing to advance or, if you want, to give us a grace when it comes to the non-amortizing period like we have done in the past. So, really, the banks, I think, are there to work with us, but the missing part, as we discussed, is access to capital.

Now, there are many ways to do this and it could be public or private capital or potentially we could start using the cash that we accumulate in advance of debt prepayments to prepay our banks and maybe get some deferral in return for that. This is all things that we will need to explore from a position of strength, of course, given the strong balance sheet and the cash reserves that we will be building and we’ll see what will be the result. But to answer your question, sure, it’s not only public markets, there are also other avenues and we intend to engage and exhaust them going forward.

Jon Chappell

Understood. Right, everything else is pretty clear. Thank you, Jerry.

Jerry Kalogiratos

Thank you, Jon.

Operator

Thank you. And your next question from UBS comes from the line of Spiro Dounis. And your line is now open.

Spiro Dounis

Hi, Jerry. Just wanted to take a step back maybe – we keep saying if capital markets open up or if equity markets open up, I guess what I struggle with now is, since you’ve been a public company, I think you’ve cut the distribution twice. I’m not questioning the wisdom of cutting it either time. And just it’s a fact at this point. And so, when you go to investors this third time to raise capital, the pitch historically, though, has been stable distribution, charter coverage, not prone to market volatility, and of course that’s, I guess, not really been the case, so what is that pitch now going forward the next time you believe you can go out to capital markets, what are you going to be telling people as the reason why now it’s different?

Jerry Kalogiratos

I think this time around and we’re not alone, I think, in this group. It is a question of access to markets together, of course, with other market related contingencies. But you saw a number of peers having to revisit the distribution. You see that also the guys that they have not – they are really struggling with valuation that provides cost of capital that is not really sustainable in the long-term. I think there has been a disruption in the MLP space as a whole. And while I think we have been prudent in the past, we have, as you know, targeted 1.1 times distribution coverage. We have been cautious in the way that we have been growing our distribution. At the same time, we were faced with these three things – if you want, the restructuring of HMM, the collapse of the container market as well as, maybe even more importantly, the fact that equity markets were closed at a time that we needed to tap them.

And as you know, in the end, the MLP model is based on the ability of companies to tap equity markets to grow and to have non-amortizing debt. So I think it’s – we tried to do everything that was right. At this point, we had to face these contingencies.

But the more important aspect of this, and I think what we will be telling investors, is that the new distribution is sustainable and that’s why we earmarked the funds for capital reserves, so nobody has any doubts as to whether – what we will be doing with the cash. It’s going to be used to repay debt. We have accommodated for any costs associated with the, let’s say, worst-case scenario with HMM, so I think – so that also people like you can see that there is visibility. And if things changed, and as I said, there is access to capital markets if we manage to refinance our debt or if we generate incremental cash that is not required to cover any costs, then we can easily revisit the distribution. It is much more difficult to come out of a situation where you have balance sheet issues as over-leveraging, or liquidity issues, or contracted CapEx that you cannot cover, then revisit your distribution upwards. We realized and we are, of course – we were also very cautious as to how and how we will treat the distribution going forward. But I think that given the message, given our contracted cash flow, hopefully, it is obvious that this new distribution level is sustainable.

Spiro Dounis

Yeah. And maybe just picking up on that last part, as I think about maybe other things that can call that into question, I’m not saying that’s necessarily the case, but obviously we got kind of blindsided by HMM here and it’s because these charter rates were, obviously, well above market. If I look across the rest of your fleet, I think I see one other vessel that’s really kind of above market, the Cape Agamemnon, I think 40,000 a day or so, which is, obviously, a really great rate. If we’re sitting there wondering, could another shoe drop, in your mind, how secure is that charter on that vessel?

Jerry Kalogiratos

I would say two things, Spiro. Firstly, the charterer is COSCO, so effectively owned by the Chinese state and now merged with China Shipping, so I will be surprised if COSCO were to default on its obligations as it is responsible for importing, together with China Shipping, raw materials into China. But secondly, we have also an insurance in place, which would – up to $25,000 per day until the almost the end of the charter in case COSCO defaulted. So, let’s say, if COSCO were to default and we were able to get $10,000 per day from now until the expiry of the charter, the insurance would pay another $25,000 up to a maximum of an aggregate of $42,000. So there is also an insurance in place.

Spiro Dounis

Perfect. Good to know. All right. Thanks, Jerry. Appreciate it.

Jerry Kalogiratos

Thank you, Spiro.

Operator

Thank you very much. Now from Janney, we have a question from the line of Mike Gyure. And your line is open, sir. I hope I pronounced your name correctly.

Mike Gyure

That’s fine. Thank you very much.

Operator

Thank you, sir.

Mike Gyure

Can you guys talk a little bit about – I think you had a disclosure in your annual report about your impairment testing. I guess I’m looking at the balance sheet and you’ve got about 1.4 value on the vessels. I assume you did your impairments this quarter and didn’t take any charges because I didn’t see any in the income statement. How do you feel, I guess, about the value of – the book value compared to market value of where your vessels stand today maybe taking into account potentially if you were to – have to recharter those containerships?

Jerry Kalogiratos

We test – we do an impairment test every quarter and there was no need to take an impairment this quarter. As you know, there is also – the impairment test is based on the difference between the – sorry, on the ability of the vessel to generate revenues going forward given its current chapter and the average historical charter until it’s at the end of its life. And so far, we have no issues with taking an impairment.

Spiro Dounis

Okay, great. And maybe one other, on your credit facility, of the four facilities that you have, which facility are the HMM vessels associated with?

Jerry Kalogiratos

HMM vessels are split between two facilities, the ING facility and one of the HSH facilities.

Spiro Dounis

Okay, great. Thank you very much.

Jerry Kalogiratos

Thank you.

Operator

Thank you very much, sir. And as there are no further questions, I shall pass the floor back to you for closing remarks.

Jerry Kalogiratos

Thank you, Jamie. And thank you all for joining us today.

Operator

And with many thanks to our speaker, that does conclude the conference and thank you all for participating. You may now disconnect. Thank you, sir.

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