Navios Maritime Holdings (NYSE:NM) had an equity market value of $93.1 million at the market close on January 15th. That is not a typo. NM's equity market value was $93.1 million at the close last Friday. In comparison, the face value of its outstanding debt as of the third quarter ended September 30, 2105 was $1.57 billion. At Friday's close, NM's debt was therefore 16x its equity market value. Its Friday closing stock price of $.86 was about 7% of its two year high price of $11.49 and at $.86 it was still overvalued. Its G and H Series of Redeemable Perpetual Preferred Stock, clearly foreshadowing a future restructuring or bankruptcy, were trading between $2.70 and $3.50 per share, down from the $25 issuance price in 2014, with yields based on trailing dividends of 70+%. Despite these clear signs of financial enfeeblement and risk, Lion Square Investments pushed the idea that NM would be able to acquire or merge with Navios Maritime Acquisition (NYSE:NNA). The article lacked sufficient financial analysis and to follow his advice or opinion risks financial peril.
NM owns 40 dry bulkers and charters-in another 25. The average age of the combined fleet as of January 2016 is 8 years but the average age of the vessels owned by NM is more than 10 years! The average age of its owned vessels is greater than the industry average of 8.8 years, as defined in NM's 3Q earnings presentation. NM also owns approximately 20% of Navios Maritime Partners (NYSE:NMM), worth approximately $32.5 million at the close on January 15th, 49.5% of NNA, worth approximately $155 million at the close on January 15th, and 63.8% of Navios South American Logistics ("NSAL"), which is worth an indeterminate amount to NM since it may not be able to meet its capital commitment obligations to the partnership during 2016. For the purpose of our analysis, we will give NM the benefit of the doubt and assume that its ownership of NSAL is worth approximately $240 million (this would require $125 million of 2016 EBITDA (flat year over year due to the commodity price driven recession in Brazil) at a 6x multiple less the partnership debt of approximately $367 million). In total NNA, NNM, and NSAL would be worth approximately $527.5 million.
Let's now look more closely at the coverage of the debt in a liquidation scenario. Of the $1.57 billion of debt noted above, NM estimates that $367 million is associated with NSAL. We will assume it is non recourse to NM and subtract it from the debt to be repaid with the liquidation of its owned vessels. Let's also subtract the value of NNA, NNM, and NSAL of $527.5 million as estimated above. This would result in net debt to be covered by the NM owned dry bulk vessels of approximately $675 million. The following valuations are based on dry bulk vessel value estimates published by Allied Shipbroking for the week January 11th through the 15th 2016.
- Capesize, 12 vessels, average age of 5 years, per vessel value of $23 million, total value of $276 million.
- Panamax, 11 vessels, average age of 10+, per vessel value of $7.3, total value of $80.3 million.
- Supramax, 14 vessels, average age of 12+ years, per vessel value of $6.5, total value of $91 million.
- Handymax, 1 vessel, 5 years old, value of $9 million.
- Total value of the fleet is therefore approximately $456.3 million
The face value of the debt, net of the NSAL debt and net of the value of the equity interests in NNA, NNM, and NSAL, exceeds the current secondary market value of the owned vessels by approximately $220 million. This is why the equity and the preferred stock of NM is worthless. Yet despite this bleak picture, Lion Square Investment argues that NM has the financial wherewithal to acquire the 50% interest of NNA it does not own.
Now let's take a quick look at NM on an operating basis. I did not include NM's cash balances in the back of the envelope liquidation analysis I performed above because I believe NM will exhaust its cash on hand in less than six months. NM had Cash on the Balance Sheet of $173.3 million at September 30, 2015, but net of the NSAL cash balance of $87.3 million consolidated for GAAP purposes per page F-17 of the 6-K filed for the 3Q, it only had cash of $86 million. On page 11 of its 3Q earnings presentation, NM estimates 2016 breakeven cash operating costs at $12,642/day/vessel. This breakeven cash cost estimate includes operating costs of the owned fleet (including drydock expenses), charter-in expenses, general and administrative expenses, interest, and capital repayments (principal payments). It does not include special survey capital expenditures or capital expenditures on the two vessels expected to be delivered in the first quarter of 2016. Page 11 also includes a rosy projection of $11,917/day/vessel in Time Charter Equivalent revenue for 2016. Unfortunately, the 3Q TCE was only $8,750 on the entire 65 vessel fleet and TCE rates have continued to decline and reach all time lows since then due to a glut of shipping capacity and a possible deceleration in the rate of economic growth. NM's TCE woes were compounded during the 4Q 2015 by the expiration of 30 charters-out with above market TCEs and it will suffer additional declines in revenue from the expiration of another 11 charters-out with above market rates during the 1Q 2016. Per Alibra Shipping LTD, 6 month TCEs (average of Pacific and Atlantic estimates) in mid January were $4750 for Capesizes, $5120 for Panamaxes, and $5250 for Ultramaxes. Even allowing for some fixed or floating rate charters-out with above market TCEs at NM, it is very unlikely that NM's fleet wide TCE exceeded $8,000 during the 4Q 2015 and that it will exceed $7,000 during the 1Q 2016. This would result in a cash burn of approximately $27 million during the 4Q and $33 million during 1Q 2016. In addition, NM could have as many as 8 vessels requiring a 10 year special survey and 5 vessels requiring a 15 year special survey amongst its owned fleet. This could amount to $20 million or more in capital expenditures during the year. Finally, S&P, in its credit rating analysis of NM, estimates that NM's share of CapEx at NSAL for 2016 will be $90 million but it does not estimate how much will be funded by debt or equity. NM can take some actions to stanch some of the cash drain during the next couple of quarters but it will only delay the inevitable need to restructure or file bankruptcy. Despite these dire operational and financial straits that NM finds itself in, Lion Square Investments would have readers believe that NM is capable of funding the acquisition of NNA.
Based on the above back of the envelope analysis, there is no possibility that NM could acquire the shares of NNA that it does not own, particularly since the fair market value of the equity of NNA in an acquisition deal would be far above the current equity market value due to its expected robust financial performance during the next several years. There are several esoteric points about a stock for stock merger that Lion Square Investments did not consider. NNA's current equity market value is approximately $312 million, more than 3x greater than NM's inflated market value of $93 million. Even in a no premium deal, NNA would be the surviving entity and a change in control put would be triggered on more than $1 billion of NM debt. It would be impossible to refinance this debt given NM's current financial condition and this would create rep and warranty issues in a Merger Agreement, i.e. it could not be done. In addition, the post merger balance sheet of a combined NNA/NM would violate the covenants of NNA's debt and they would never be able to get creditor approval for such a deal.
Conclusion: NM is in severe financial straits and will need to restructure or file for bankruptcy during the next 12 months barring a miraculous recovery in dry bulk rates. Any investor that owns NM's common stock, preferred stock or debt should review the position and evaluate an immediate sale. NNA has seen the price of its stock dragged down by the financial difficulties of NM, a brutal selloff in energy, commodity, and economically sensitive stocks, and the general market selloff that has marred the first 10 trading days of 2016. It is worth monitoring NNA as a potential future investment as it continues to be dragged down by NM's financial woes.
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.