Navios Maritime Acquisition Corporation:  Is It A Buy Before Earnings?

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About: Navios Maritime Acquisition Corporation (NNA), Includes: NAP, NM, NMM
by: Morningsidepark
Summary

Navios Acquisition is down almost 42% since its last ex-dividend date and has recently set a new 52 week low.

The Company's liability under the Backstop Agreement with Navios Midstream was $16.4 million for the full year 2017 due to unseasonably weak VLCC Q4 spot rates.

Due to continued weak VLCC spot rates 2108 to date and the expectation for seasonably weak rates through Q3, the 2018 Backstop liability could easily exceed $20 million.

Navios Acquisition will struggle to pass its Liquidity and Leverage covenant tests at year end and will eventually fail them during 2018.

Q4 2017 earnings will be released February 7th.

Navios Maritime Acquisition Corporation (NYSE:NNA) is a 41.6% subsidiary of Navios Maritime Holdings Inc. (NYSE:NM), and it owns a 59% economic interest in Navios Maritime Midstream Partners LP (NYSE:NAP) through its GP and Subordinated Units. It is an affiliate and joint venture partner in Navios Europe I and II of Navios Maritime Partners LP (NYSE:NMM). I have written a series of articles on NNA that serve as a primer for this article. They must be read (particularly "Desperate Times, Desperate Measures" and "Time for the Life Jackets") to understand some of the analysis that will appear in this article.

Liquidity Covenant Test

As discussed in "Desperate Times, Desperate Measures", NM was forced to prepay $55.1 million of principal and accreted interest due under its Credit Facility with NNA during Q4. Without this prepayment, NNA would have defaulted on the $27.2 million November 15th coupon payment for the $670 Million of First Priority Ship Mortgage Notes Due 2021 ("Ship Notes"). The table below provides an estimate of NNA Unrestricted Cash at the end of Q4.

Navios Maritime Acquisition Corporation
Q4 Unrestricted Cash Rollforward
Q4 Estimates
EBITDA $20.00
Interest Expense ex Ship Note Coupon $(4.70)
Ship Note Coupon $(27.20)
Maintenance CapEx $(5.00)
Principal Payments $(10.00)
Puttable Common Stock $(0.25)
Dividends Paid By NNA $(7.90)
Subtotal $(35.05)
Dividends From NAP $4.90
Proceeds From NM CF Prepayment $55.10
CFFO less Prin Pmt, CapEx, Divs $24.95
Unrestricted Cash @ September 30 $58.20
Cash @ December 31st $83.15
Less Minimum Liquidity $(40.00)
Unrestricted Cash @ December 31st $43.15
  • EBITDA is assumed to be $3.3 million less than actual EBITDA of $23.3 million realized during Q3 due to the roll off of above market TCs on six VLCCs during Q3 and Q4.
  • Maintenance CapEx averaged $3.47 million for the first three quarters of 2017. This seemed low since four vessels were due for 10 year Special Surveys and one for a 15 year Special Survey. Q4 Maintenance CapEx was assumed at $5 million.
  • Quarterly principal payments are based on the principal due during the next 12 months as disclosed in the Debt Footnote of the quarterly financials for Q3.
  • No assumptions are made regarding changes in the Due To/Due From Related Party accounts. There was a $10 million swing during Q3 that benefitted NNA and it is possible that a portion of this swing may revert during Q4.

The table clearly indicates that NNA will have sufficient liquidity at the end of Q4 to pass the liquidity test. The following table estimates the Unrestricted Cash Balances at the end of Q1 and Q2.

Q1 Estimates
EBITDA $19.00
Interest Expense ex Ship Note Coupon $(4.70)
Ship Note Coupon $-
Maintenance CapEx $(4.00)
Principal Payments $(10.00)
Backstop Agreement Payment $(16.40)
Dividends Paid By NNA $(7.90)
Dividends From NAP $4.90
CFFO less Prin Pmt, CapEx, Divs $(19.10)
Cash @ December 31st $83.15
Cash @ March 31st $64.05
Less Minimum Liquidity $(40.00)
Unrestricted Cash @ March 31st $24.05
Q2 Estimates
EBITDA $18.00
Interest Expense ex Ship Note Coupon $(4.70)
Ship Note Coupon $(27.20)
Maintenance CapEx $(4.00)
Principal Payments $(10.00)
Dividends Paid By NNA $-
Dividends From NAP $-
CFFO less Prin Pmt, CapEx, Divs $(27.90)
Cash @ March 31st $64.05
Cash @ June 30th $36.15
Less Minimum Liquidity $(40.00)
Unrestricted Cash @ March 31st $(3.85)

Q1 is typically weaker than Q4, so EBITDA is assumed to decline $1 million on a quarter to quarter basis. The Ship Notes have semiannual coupon payments in May and November, so no coupon payment occurs during Q1. The Backstop Agreement payment of $16.4 million for amounts accreted during 2017 is made during Q1. It is assumed that NNA makes a dividend payment during Q1. NAP has already announced its cash distribution that will be payable during February. All other assumptions remain the same for Q1.

For Q2, the semiannual coupon payment of $27.2 million for the Ship Notes will occur during May. It is assumed that NNA will not pay a dividend during Q2 nor will it receive a cash distribution from NAP on its Common and GP Units. EBITDA is reduced again to reflect a seasonally weak quarter.

The forecast clearly illustrates that, barring an asset sale, NNA will violate its minimum liquidity covenant. I fully expect NNA to sell its Euro I and II notes to NNM as another desperate measure to replenish liquidity.

Leverage Covenant Test

NNA faces a year end Leverage Covenant Test that it is likely to fail. Total liabilities divided by total assets, adjusted for market value, has to be lower than 75%.

The continued losses at NNA will make it increasingly difficult to pass the leverage covenant test at year end 2017. As illustrated in the table below, the results of the Total Liabilities to Total Assets leverage covenant test were above the 75% limit and have deteriorated each quarter. It may require additional restricted cash at year end to cure.

Navios Maritime Acquisition Corp
Total Liabilities to Total Assets Covenant Test
March 31st June 30th September 30th
Total Liabilities $1,141.7 $1,122.3 $1,131.1
Total Assets $1,713.8 $1,621.4 $1,613.7
Excess Vessel Carrying Value over FMV $(211.9) $(152.8) $(152.8)
Adjusted Total Assets $1,501.9 $1,468.6 $1,460.9
Covenant Test 76.02% 76.42% 77.43%

The market value adjustment at December 31st, 2016, was $211.9 million. NNA wrote down its investment in NAP by $59.1 million during Q2 due to the permanent impairment of its value. I therefore reduced the market value adjustment by the writedown in the table below. Please note that no assumptions have been made about a reduction in VLCC valuations due to the decline in rates. This would be an area of risk for NNA.

The following table is an estimate of Total Assets and Total Liabilities at December 31st based on operating assumptions for Q4 included in the calculation of Unrestricted Cash at December 31st from the table above and certain non cash changes to asset and liability balances.

Q4 Estimates
Total Assets @ September 30th $1,613.70
Depreciation & Amortization $(15.20)
PP&E Increase Due to Maintenance CapEx $5.00
Prepayment of NM Credit Facility $(55.10)
CFFO less Prin Pmt, CapEx, Divs $24.95
Total Assets @ December 31st $1,573.35
Total Liabilities @ September 30th $1,131.10
Principal Payments $(10.00)
Reduction in Accrued Interest $(13.60)
Amort of Deferred Gain on Sales $(0.28)
Amort of Debt Issuance Fees $1.10
Total Liabilities @ December 31st $1,108.32

The following table is updated to include the Leverage Covenant Test for December 31st based on estimates of Total Assets and Liabilities. The table illustrates that NNA has failed or will fail the Leverage Covenant Test for all four quarters. In order to pass the Leverage Covenant Test, Total Liabilities would need to be lower by $48.27 million or Total Assets would need to be higher by $57.1 million.

The key variable in the test will be the Excess Carrying Value over FMV adjustment. It is unlikely to change meaningfully since VLCC ship values and product tanker values have been relatively flat for the last year. Any increases would likely be offset by the one year increase in age of the fleet.

March 31st June 30th September 30th December 31st
Total Liabilities $1,141.7 $1,122.3 $1,131.1 1108.32
Total Assets $1,713.8 $1,621.4 $1,613.7 1573.35
Excess Vessel Carrying Value over FMV $(211.9) $(152.8) $(152.8) $(152.8)
Adjusted Total Assets $1,501.9 $1,468.6 $1,460.9 $1,420.6
Covenant Test 76.02% 76.42% 77.43% 78.02%

If NNA does fail the Leverage Covenant Test, it could cure the test failure by restricting cash, but this would harm liquidity further. It could potentially sell the Euro I and II notes and investments and pay down debt, but this would reduce Total Assets and Total Liabilities and likely not solve the test failure. The creditors may waive the Leverage Covenant Test failure, but this would certainly entail an agreement to eliminate common stock dividends and implement other restrictions on the use of cash.

Conclusion

Angeliki Frangou has a track record of wriggling out of tight financial spots at the various Navios companies, but conditions in the tanker market and the debt covenants, which are not very restrictive, make it unlikely that there is a Houdini act that would result in the maintenance of the NNA common stock dividend beyond the first quarter. This harsh reality is reflected in the 42% stock price decline during the last three months. There are much better yield alternatives. If you own NNA, sell now before the earnings release. If you don't own it, do not be tempted to try to capture a dividend. The risk is not worth it.

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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