Navios Maritime - Preferred Stock Valuation

| About: Navios Maritime (NM.PG)

Summary

In February 2016, Navios Maritime stopped paying dividends on its preferred stock.

4 quarters, an exchange and consent solicitation and a shareholders meeting later - still nothing.

I present a means of valuing the preferred stock.

It is impossible to look at the preferred stock of Navios Maritime (NYSE:NM) without reading how we got to this juncture. If you are reading this, you are most likely familiar with the travails of the shipping industry which has affected shippers, owner/lessors and charterers. It has been difficult sailing for the sector which is why the yields of many of the participants and the various slices of their capital structure are "elevated".

Navios Maritime is no exception. Its equity has flirted with being delisted, the dividend has been cut on the common and preferred and the convoluted structure would make the old Kinder Morgan blush. But this is about the preferred stock, so the best place to start is when the company confirmed their dire straits and took their pound of flesh from the preferred stock.

On February 25, 2016 Navios Maritime Holdings dropped the following bomb in their 6-k:

Preferred Stock Dividends

In connection with its efforts to reduce its cash requirements, Navios Holdings announced that it intends to suspend the payment of quarterly dividends on its preferred stock, including the Series G and Series H Preferred Stock, until market conditions improve.

The result was the acceleration of the pain the preferred holders had been experiencing for around 3 months:

Chart from QuoteMedia.

When this happens, an investor must start with the prospectus (I reference Series H, language is the same in the Series G - all emphasis mine):

Holders of the Series H Preferred Stock and Depositary Shares generally have no voting rights. However, (i) if and when dividends payable on the Series H Preferred Stock are in arrears for one quarterly period, we will use commercially reasonable efforts to obtain an amendment to our articles of incorporation to effectuate any and all such changes thereto as may be necessary to permit the Series H Preferred Shareholders (as defined below) to exercise the voting rights described in the following clause (ii)(X), and (ii) if and when dividends payable on the Series H Preferred Stock are in arrears for six or more quarterly periods, whether or not consecutive, then if our articles of incorporation have been amended as described in the preceding clause , holders of Series H Preferred Stock (voting together as a class with all other classes or series of Parity Securities upon which like voting rights have been conferred and are exercisable) will be entitled to elect one additional director to serve on our board of directors, and the size of our board of directors will be increased as needed to accommodate such change, and (Y) if our articles of incorporation have not been amended as described in the preceding clause , then, until such amendment is fully approved and effective, the dividend rate on the Series H Preferred Stock shall increase by 25 basis points. For avoidance of doubt, commercially reasonable efforts shall not be deemed to include the requirement to pay any consent or other fee to obtain such amendment. Dividends payable on the Series H Preferred Stock will be considered to be in arrears for any quarterly period for which full cumulative dividends through the most recent dividend payment date have not been paid on all outstanding Series H Preferred Stock. Any such amendment to our articles of incorporation, if obtained, shall also provide that the right of such holders of Series H Preferred Stock to elect a member of our board of directors will continue until such time as all accumulated and unpaid dividends on the Series H Preferred Stock have been paid in full.

Unless we have received the affirmative vote or consent of the holders of at least two-thirds of the outstanding Series H Preferred Stock, voting as a single class, we may not adopt any amendment to our articles of incorporation that would materially and adversely alter the preferences, powers or rights of the Series H Preferred Stock.

In addition, unless we have received the affirmative vote or consent of the holders of at least two-thirds of the outstanding Series H Preferred Stock, voting as a class together with holders of any other Parity Securities upon which like voting rights have been conferred and are exercisable, we may not issue any Parity Securities if the cumulative dividends on Series H Preferred Stock are in arrears or (ii) create or issue any Senior Securities.

Okay, six quarters unpaid and the company will make commercially reasonable efforts to give preferred holders a seat on the board (more on this soon).

Series G prospectus

Series H prospectus

Next, in September, the company commenced a tender and consent offer for the preferred shares:

Exchange and Consent - September 19, 2016

We are seeking the consent of holders to the proposed amended and restated certificates of designation of the Series G Preferred and Series H Preferred. The amendments will eliminate substantially all of the voting rights and restrictive covenants in our existing Preferred Shares certificates of designation, including:

  • deleting the requirement for payment of accrued dividends on the Preferred Shares, whether in the future or in arrears;
  • deleting the requirement that, if and when dividends on the Preferred Shares are in arrears for six or more quarterly periods, whether or not consecutive (and whether or not such dividends shall have been declared and whether or not there are profits, surplus, or other funds legally available for the payment of dividends), the holders will have the right to elect a member of our Board of Directors or receive any increase in the dividend rate for such Preferred Shares;
  • amending the requirement that, without the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding series of Preferred Shares, voting as a single class, the Company shall not adopt any amendment to the Articles of Incorporation, as amended from time to time ("Articles of Incorporation"), that materially and adversely alters the preferences, power or rights of such Preferred Shares, to be reduced to the affirmative vote or consent of the holders of at least a majority of the outstanding series of Preferred Shares and (ii) voting as a class together with holders of any other parity securities, the Company shall not create or issue any senior securities, to be reduced to the affirmative vote or consent of the holders of at least a majority of the outstanding series of Preferred Shares;
  • deleting the requirement that, without the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding series of Preferred Shares, voting as a class together with holders of any other parity securities, the Company shall not issue any parity securities if the cumulative dividends payable on outstanding Preferred Shares are in arrears; and
  • deleting the requirement that, in the event that full cumulative dividends on the Preferred Shares and any parity securities shall not have been paid or declared and set apart for payment, none of the Company or any Affiliate of the Company may repurchase, redeem or otherwise acquire any series of Preferred Shares or parity securities.

The tender by a holder of Series G ADSs or Series H ADSs pursuant to this Exchange Offer will constitute the granting of consent by such holder to the proposed amended and restated Series G Preferred or Series H Preferred certificate of designation, as applicable. Such consent will be provided as an instruction to The Bank of New York Mellon, the Depositary, as the only "holder" of Preferred Shares, to vote the tendered Preferred Shares in favor of the proposed amended and restated certificates of designation. Consents of at least 66 2/3% of the outstanding shares of each of the Series G Preferred and the Series H Preferred must be received in order to amend and restate the respective certificates of designation under which such Preferred Shares were issued.

Good times.

Norman Roberts was a vocal dissident, mosey on over to his site if you want "as it happened" insight.

After various amendments, the company failed to get the tenders required to cram the changes down on the "non-exchanging" holders:

T&C Results - November 8, 2016

The Exchange Offer expired at 11:59 p.m., Eastern Time, on November 7, 2016. Pursuant to the terms and conditions of the Exchange Offer, the Company accepted for exchange a total of 544,987 Series G ADSs and 1,898,285 Series H ADSs, representing approximately 27% of the Series G ADSs and 40% of the Series H ADSs. The Company is issuing a total of 1,715,096 shares of its newly issued shares of common stock ("Common Stock") and paying an aggregate of $1,955,209 in cash in exchange for the Series G ADSs and a total of 5,874,393 shares of its Common Stock and paying an aggregate of $6,696,808 in cash in exchange for the Series H ADSs tendered and accepted by the Company in the Exchange Offer. The Series G ADSs that were tendered for an election of cash are subject to a downward proration factor of 0.3399 and the Series H ADSs that were tendered for an election of cash are subject to a downward proration factor of 0.4167.

Then rehashed it in their quarterly report:

On November 8, 2016, the Company announced the completion of its offer to exchange cash and/or newly issued shares of common stock for any and all outstanding American Depository Shares ("ADSs"), each representing 1/100th of a share of its Series G and Series H Cumulative Redeemable Perpetual Preferred Stock ("Series G" and "Series H" respectively). A total number of ADSs representing 24,431 shares of Series G and Series H were validly tendered in the exchange offer, representing an aggregate nominal value of $61.1 million. We reduced our annual dividend obligation by $5.3 million and we also eliminated $4.0 million of accrued dividends.

The failed tender offer meant if the company continued to defer the dividends, they would have to make "commercially reasonable efforts" to amend their charter and give the preferred holders a seat on the board.

This was reflected in their proxy:

Proposal 2: Approve the Amendment to the Charter

The affirmative vote of the holders of two-thirds of the Company's issued and outstanding common stock entitled to vote is required to approve the amendment to the Charter. Abstentions and broker non-votes will be treated as votes against this proposal. Under the Certificates of Designation for our Series G and Series H Preferred Stock (the "Certificate of Designations"), if either one quarterly Series G or Series H Dividend are in arrears, then the Company is required to use commercially reasonable efforts to obtain an amendment to the Charter to effectuate any and all such changes as may be necessary to permit the Series G and/or Series H Holders the ability to exercise certain voting rights pursuant to the Certificate of Designations. As of the date of this Proxy Statement, three quarterly Series G and Series H Dividends are in arrears.

The Board of Directors recommends that you vote as follows: "FOR" the amendment to the Charter;

Naturally, preferred shareholders held their breath. Alas, it was not to be.

Annual Meeting Results: January 24, 2017 6-k

On December 15, 2016, the Company held its 2016 Annual Meeting of Stockholders (the "Annual Meeting"). The record date for the Annual Meeting was November 24, 2016. As of the record date, a total of 117,127,796 shares of the Company's common stock were entitled to vote at the Annual Meeting. There were 44,951,726 shares of common stock present in person or by proxy at the Annual Meeting. Set forth below are the matters acted upon by the stockholders, and the final voting results of each such proposal.

Approval of an amendment to the Charter. Consistent with the Certificates of Designation for the Company's Series G and Series H Preferred Stock (the "Certificates of Designation"), the Company proposed an amendment to the Charter to effectuate any and all such changes as may be necessary to permit the Series G and/or Series H Holders the ability to exercise certain voting rights pursuant to the Certificates of Designation. This proposal failed to receive the affirmative vote of holders of two-thirds of the Company's issued and outstanding common stock entitled to vote at the Annual Meeting which was required to approve the proposal.

For:43,989,924

Against:738,376

Abstain:223,426

That should catch you up on this series of unfortunate events. Unfortunately, what is an investor to do?

The following is the creation/construction of a valuation construct that may help investors determine the "value" of the preferred shares in order to get a handle on if or where they should get involved.

The primary variables used are the following:

  1. Length of time until dividends are resumed,
  2. Yield at which the preferred stock will trade when/if dividends are resumed, and
  3. The appropriate discount rate for the valuation.

These three factors can be seen in the following example using the Series G preferred:

Before continuing, some might ask why I have stepped the rate on the preferred stock(s) up by 25bps to 9%. Recall the excerpt from the prospectus which stated:

If our articles of incorporation have not been amended as described in the preceding clause, then, until such amendment is fully approved and effective, the dividend rate on the Series H Preferred Stock shall increase by 25 basis points.

In two quarters, the six quarter hurdle will have been met. This necessitates increasing the rate if it is expected that it will be longer before dividends are resumed.

The steps are somewhat straightforward in the example above. I have then taken these values and created a matrix for varying assumptions and the resultant value.

In the matrix above, if an investor were to assume that dividends will be resumed in three years and the appropriate discount rate was 15%, the value of the preferred shares under these assumptions is $18.07 - a full $6.09 above the current price.

I have also done the same exercise with the Series H preferred. First the example:

Then the matrix.

The logical question that comes up is "why the delta between the value and the price?" The only answer is margin for error.

On the company's most recent earnings call, the only reference to this was the amount they are saving by having exchanged the preferred. There was no reference to the dividend and no reference to the proxy - then again, not a single question regarding the preferred either.

By submitting a change to the charter to a vote, I believe that the company has signaled that they will not be reinstating the dividend soon (the change would be required in July).

While they could not get the tender and consent through, I do believe they will try again. Why? Because they can "hint" that dividends will not be forthcoming for quite some time, which makes an exchange for common and cash more compelling. Essentially, they can try to break the preferred holders using time. Of course, this means that they cannot pay a common dividend either. The only response I have to that is that the right securities lawyers will find a way to make it happen. If the means exists, I believe the company will find it.

The delta is the margin of error due to timing, required discount rate and the possibility of bankruptcy. All three are significant variables.

Am I a buyer? No. I believe that there are other opportunities that afford equal or greater upside (par is 110% or so) and/or income. Back in the day, I played in the deferred RBS preferreds as the outcome had better odds. Here, I am not so sure. Back at $2-4, they were an option on the company's viability; at $12, they just aren't compelling to me.

That said, if you think they resume dividend in a year and the appropriate discount rate is, say 20%, then you are looking for a 50% return. This is why I have written this note, to create a framework for valuation should you be tempted.

Disclosure: I am/we are long CMRE.

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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