Navios Maritime Holdings Inc (NM) is the parent of Navios Maritime Partners LP (NYSE:NMM), Navios Maritime Acquisitions Inc. (NYSE:NNA) (which in turn is the parent of Navios Maritime Midstream Partners LP (NYSE:NAP) and Navios South American Logistics Inc ("NSAL") a privately held corporation. Prior articles analyzing NM are available here and serve as a primer for the analysis contained in this article.
NM was busy on November 6th:
- Released Q3 earnings and financial statements.
- Announced an Offering of $300 million (before fees and expenses) Senior Secured Notes Due 2022 ("2022 Notes") in the Private Placement market.
- Announced the commencement of a cash tender offer (the "Tender Offer") for any and all of their outstanding 8 1/8% Senior Notes due 2019 (the "2019 Notes")
NM announced the prepayment of the NNA Credit Facility in the amount of $55.1 million of principal and interest in conjunction with NNA's earnings release on November 2nd. NM also announced the completion of a $100 million Term Loan B offering at NSAL on November 3rd. Proceeds of the NSAL Term Loan B offering will be used to pay a $44.7 million dividend to NM.
FSL Trust Acquisition Failure Was a Warning Flag
As I wrote in "Acquisition Failure Is a Warning Flag" (see article links above), NM's failure to close its acquisition of HSH Nordbank's ownership interest in FSL Trust was an early warning of NM's continuing liquidity issues. Although the acquisition and the related convertible funding would have only required $40 million, NM's Dry Bulk Segment Unrestricted Cash Balance of $46.15 million at September 30th clearly shows that the liquidity noose was really chafing NM's neck and it lacked the wherewithal to close the acquisition. Not only was NM suffering liquidity issues, but its subsidiary NNA was heading to default on a bond interest payment on November 15th if it did not sell assets or raise cash by another means.
NNA Credit Facility Repayment
The NNA Credit Facility Repayment is covered in detail in the NNA article "Desperate Times. Desperate Measures.". As noted in the article:
...NNA faced a Q4 liquidity crisis and the prepayment of the Credit Facility was the only viable alternative to avoid a default on the $27.2 million November 15th coupon payment for the $670 Million of First Priority Ship Mortgage Notes Due 2021 ("Ship Notes").
The prepayment of the NNA Credit Facility will free up the NSAL and NNA equity and it will be used as collateral to secure the 2022 Notes. Since Dry Bulk Segment Unconsolidated Cash was $46.15 million at September 30th, it did not have the liquidity to prepay the NNA Credit Facility. It therefore opted to further leverage NSAL through the issuance of a Term Loan B of $100 million with a portion of the proceeds used to fund a dividend payment to the partners, including $44.7 million to NM.
NSAL Term Loan B
NSAL announced the closing of the Term Loan B on November 3rd (see press release link above). NM was able to arrange the Term Loan B because the Vale contract for the new Iron Ore Port commenced, derisking NSAL operations. Since NSAL was not going to produce sufficient free cash flow to pay dividends (see "NSAL Constrained by Debt Covenants"), NSAL must have reached an accommodation with the senior debt to facilitate the payment of the dividend as part of the Term Loan B arrangement. That may be why only approximately $70 million of the Term Loan B proceeds were used to pay a dividend (as well as cover the issuance costs) and the remainder was retained for "general corporate purposes", restricted cash perhaps. That is a topic for another article.
The $100 million of debt is likely the last piece of leverage that NM will be able to issue at the NSAL for quite some time. NSAL will not be a source of cash for NM over the next couple of years. The additional leverage also reduces the value of the NSAL equity that will secure the 2022 Notes.
Net Proceeds From the Various Financings and Repayments
With the frenzy of finance activity by NM, the hope would be that the Company improved its liquidity position. As detailed in the Sources and Uses table below, the reality is that NM burned more cash than it generated. NM's Dry Bulk Segment Unrestricted Cash will have declined by $8.6 million after completion of the contemplated Offering and Tender. This is a big number since NM only had $46.15 in Unrestricted Cash.
|Navios Maritime Holdings|
|Sources and Uses of Cash|
|2022 Notes( net of 2% Fees and Costs)||$294.0|
|NNA Credit Facility Prepayment||$55.1|
|2019 Note Tender (1)||$292.2|
|Net Use of Funds||$(8.6)|
|(1) Assumes the $291.1 million outstanding 2019 Notes are Tendered at $1003.75|
The 2019 Notes Tender Offer is subject to the successful completion of the 2022 Notes Offering. During 2022, NM will have approximately $950 million of debt maturing. The real purpose of NM's refinancing strategy was to reduce near term maturities in an attempt to obtain additional time for the Dry Bulk market to continue to improve and hopefully to provide sufficient cash flow to begin to pay down debt. Unfortunately, NM is so badly over leveraged that the financial engineering is just postponing the inevitable.
Q3 Earnings Takeaways
I will do a more complete earnings analysis in a subsequent article. For now, here are the most important takeaways from Q3 earnings. NM must be analyzed on a deconsolidated basis, i.e. backing out NSAL financial results and balance sheet. Footnote 11 on page F-25 provides basic deconsolidated information.
- Dry Bulk Segment EBITDA was $11.8 million in comparison with Q2 EBITDA of $12 million. The decline in EBITDA was due to a 3 vessel decline in the fleet offset by a $318 per day TCE increase. Interest Expense for Q3 was $21.38 million, meaning that EBITDA failed to cover interest expense by more than $9 million.
- Dry Bulk Segment Unrestricted Cash was $46.15 million at September 30th, down from $67.3 million at June 30th. This equates to a quarterly cash burn of $21.15 million. Let's put that in context. NM has Dry Bulk Segment Unrestricted Cash of $46.15 million but its Q3 cash burn was $21.15. Yikes. The good news is that NM's Dry Bulk Segment TCE for Q4 will increase and it should be sufficient to achieve breakeven cash flow. The bad news is that the 2019 Notes Tender and the NNA Credit Facility prepayment less the NSAL dividend and net proceeds from 2022 Notes Offering may result in an estimated net USE of cash of $8.6 (see above for the analysis).
Covenants on NM Credit Facilities
The majority of the Company's senior secured credit facilities require compliance with maintenance covenants, including (NYSE:I) value-to-loan ratio covenants, based on either charter-adjusted valuations, or charter-free valuations, ranging from over 110% to 130%, (ii) minimum liquidity up to a maximum of $30,000, and (III) net total debt divided by total assets, as defined in each senior secured credit facility, ranging from a maximum of 75% to 80%. Certain covenants in our senior secured credit facilities have been waived for a specific period of time up to a maximum of five quarters (from the current balance sheet date) and/or amended to include (I) value-to-loan ratio covenants, based on either charter-adjusted valuations, or charter-free valuations, ranging from over 110% to 135%, and (ii) net total debt divided by total assets, as defined in each senior secured credit facility, to a maximum of 90%.
Essentially NM is stating that it violated all of its financial covenants of its senior secured credit facilities and renegotiated far looser covenants to buy time. This serves to further illustrate NM's in extremis financial condition.
NM is a woefully over levered company with questionable management team. Neither the common stock nor the preferred stock pays dividends. There are plenty of better investment vehicles in the shipping sector. Avoid.
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.