Why NSAL Is Of Little Practical Value To Navios Maritime Holdings

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About: Navios Maritime Holdings Inc. (NM), NM.PG, NM.PH, Includes: NMCI, NMM, NNA
by: Morningsidepark
Summary

Navios South American Logistics is a modestly profitable, 63.8% owned subsidiary of NM that operates barges, ports, coastal tankers, and a cabotage business in the Hidrovia in Uruguay, Brazil, Argentina.

NASL, however, is of limited practical value to NM shareholders since it is restricted in the dividends it can pay.

NM's NSAL ownership position is also pledged to secure NM's Senior Secured notes which are deeply underwater relative to the assets pledged to secure them.

AT Q3 2018, $82.5 million of NSAL's cash is consolidated on NM's balance sheet. Due to indenture restrictions, less than $3 million could be currently available as a dividend to NM.

To obtain a true picture of NM's severe liquidity restraints, NSAL must always be unconsolidated from the NM's financial statements.

Navios Maritime Holdings, Inc. (NM) is a financially troubled microcap, and it is extremely risky as an investment or trade from either the short or long side. It is the parent company of Navios Maritime Partners (NMM), Navios Maritime Acquisition (NNA), Navios Maritime Containers LP (NMCI) and Navios South American Logistics (NSAL), a privately-held company. Prior articles analyzing NM are available here and are a must-read primer to understand the following analysis. Navios has an outstanding Tender Offer for its Series G (NM.PG) and H (NM.PH) Preferred Stocks. The Tender Offer is analyzed in detail in two articles:

The last article published specifically about NSAL may be found here.

This article will focus on the Restricted Payments language in the indenture of the 7.25% Senior Notes Due 2022 and the Term Loan B Due 2021 that will continue to impede NSAL from declaring meaningful dividends during 2019 and 2020.

NSAL 7.25% Senior Notes due 2022 Indenture

Section 4 of the 7.25% Senior Notes due 2022 Indenture contains the covenant language that impacts NSAL's ability to issue additional debt and Section 4.11 contains the language specific to Restricted Payments, the definition of which includes dividends on NSAL's stock. NSAL made a dividend payment of $70 million during 4Q 2017 with the proceeds from the issuance of the Term Loan B and, as detailed below, this likely exhausted its ability to pay meaningful future dividends during 2019.

Restricted Payments may be made if the following is applicable:

(1) No Default or Event of Default shall have occurred and be continuing or would occur as a consequence of such Restricted Payment;

(2) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in Section 4.10(A); and

(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries since the Buildup Amount Start Date (excluding Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7), (8), (9), (10), (14) and (15) of Section 4.11(b)), is not greater than the sum, without duplication, of:

(A) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from January 1, 2011, to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus

(B) (i) 100% of the aggregate net cash proceeds and (ii) 100% of the Fair Market Value of the property and assets other than cash, in each case, received by the Company after the Buildup Amount Start Date as a contribution to its equity capital or from the issue or sale (other than to a Restricted Subsidiary of the Company) of Qualified Equity Interests, including upon the exercise of options or warrants, or from the issue or sale (other than to a Restricted Subsidiary of the Company) of Disqualified Stock or Indebtedness of the Company that has been converted into or exchanged for Qualified Equity Interests, together with the aggregate cash and Cash Equivalents received by the Company or any of its Restricted Subsidiaries at the time of such conversion or exchange; provided, however, that this clause (B) shall not include (y) the proceeds from any such contribution or issuance or sale to the extent used to incur Contribution Indebtedness or (z) Excluded Contributions; plus

(C) to the extent that any Restricted Investment that was made after the Buildup Amount Start Date is sold or otherwise liquidated or repaid for cash or Cash Equivalents, the return of capital in cash or Cash Equivalents with respect to such Restricted Investment (less the cost of disposition, if any); plus

(D) to the extent that any Unrestricted Subsidiary of the Company is redesignated as a Restricted Subsidiary after the Buildup Amount Start Date or is merged into the Company or a Restricted Subsidiary or transfers all or substantially all its assets to the Company or a Restricted Subsidiary or an entity in which the Company or a Restricted Subsidiary has made a Restricted Investment becomes a Restricted Subsidiary, the Fair Market Value of the Investment of the Company and its Restricted Subsidiaries in such Subsidiary (or the assets so transferred, if applicable) as of the date of such redesignation (other than to the extent of such Investment in such Unrestricted Subsidiary that was made as a Permitted Investment) merger, transfer or other action, as the case may be; plus

(E) any amount previously treated as a Restricted Payment on account of any guarantee entered into by the Company or a Restricted Subsidiary upon the unconditional release of such guarantee.

NSAL was not in default at the time of the $70 million dividend payment and the Company could also incur an additional dollar of debt because its 12-month trailing EBITDA to Fixed Charge coverage ratio was in excess of 2x after adjusting for the Term Loan B. The conditions delineated in paragraph (1) and (2) were therefore met at the time of the Q4 2017 dividend payment.

Paragraph (3) requires a bit more analysis to quantify its impact on Restricted Payments and is the paragraph that will restrict future dividend payments by NSAL. Paragraph (3) allows a limited amount of Restricted Payments if, cumulatively, they do not exceed the cumulative impact of the five items defined in subparagraphs A through E.

Subparagraph A deals with Consolidated Net Income for the period beginning January 1, 2011, through the end of the most recent quarter prior to the Restricted Payment. For the Dividend paid Q4 2017, that would be January 1, 2011, through September 30th, 2017. The following tables provide the roll forwards for NSAL's equity accounts for that period.

Common Additional Retained Total
Stock Paid-In Earnings Equity
Capital
Balance, value at Dec. 31, 2010 $ 20 $ 292,668 $ 17,342 $ 310,030
Acquisition Noncontrolling Interest $ 10,850 $ 10,850
Net Income (Loss) $ (196) $ (196)
Balance, value at Dec. 31, 2011 $ 20 $ 303,518 $ 17,146 $ 320,684
Net Income (Loss) $ 156 $ 156
Balance, value at Dec. 31, 2012 $ 20 $ 303,518 $ 17,302 $ 320,840
Acquisition Noncontrolling Interest $ (77) $ (77)
Net Income (Loss) $ 9,716 $ 9,716
Balance, value at Dec. 31, 2013 $ 20 $ 303,441 $ 27,018 $ 330,479
Net income/(loss) $ (16,704) (16,704)
Balance at Dec. 31, 2014 $ 20 $ 303,441 $ 10,314 313,775
Net income/(loss) $ 22,238 22,238
Balance at Dec. 31, 2015 $ 20 $ 303,441 $ 32,552 336,013
Net income/(loss) $ 10,157 10,157
Balance at Dec. 31, 2016 $ 20 $ 303,441 $ 42,709 $ 346,170
Net income/(loss) $ 3,105 3105
Dividends $ (70,000) -70000
Balance at Dec. 31, 2017 $ 20 $ 233,441 $ 45,814 279275
Net income/(loss) $ 9,677 9677
Balance at Sept. 30th, 2018 $ 20 $ 233,441 $ 55,491 288952

The Q3 2018 Retained Earnings of $55.491 million less the Year End 2010 Retained Earnings of $17.342 million results in Consolidated Net Income since the Buildup Start Date of $38.149 million. 50% of this amount would have been available as a dividend, so $19.074 million.

There were no Equity Contributions through the contribution of property or any issuance of equity since the Buildup Start Date as defined in Paragraph B. With regards to Paragraph D, page 69 of the 2012 20-F discloses that all of the direct and indirect subsidiaries of NSAL were guarantors (i.e. Restricted Subsidiaries) of the then existing loan agreements with the exception of Hidronave and the finance subsidiary. Several noncontrolling interests in subsidiaries were acquired after the Buildup Start Date during 2011 for $10.85 million. To be conservative in the analysis, this will be treated as an addition to Restricted Subsidiaries in the table below.

A review of Footnote 6 "Fixed Assets" in the annual and quarterly Financial Statements since the Buildup Start Date reveals dispositions totaling $3.85 million. Although the date of acquisition of some of these assets is not known, to be conservative, it is assumed that the assets were acquired and disposed after the Buildup Start Date.

NSAL Restricted Payments Calculation
(000s)
50% Consolidated Net Income Since Buildup Date $19,074
Asset Dispositions $3,849
Equity Issuance $0
Additional Restricted Subsidiaries
(noncontrolling ownership repurchase) $10,850
Restricted Payment Carveout $30,000
Estimated Total Allowable Dividends $63,773
Dividend Paid Q4 2017 $70,000

Several items to note about the above table:

  • The 50% of Consolidated Net Income Since Buildup Date is as of Q3 2018 and the $70 million Dividend was paid Q4 2017.
  • Section 4.11(b) of the Indenture provides a $30 million carveout for Restricted Payments, i.e. as long as the payment would not result in a default NSAL may make $30 million (in total) Restricted Payments during the term of the debt and indenture.
  • Estimated Total Allowable Dividends are less than the actual dividends declared during Q4 2017. This could be the result of the entities related to the repurchased noncontrolling interests being reclassified as Restricted Subsidiaries (implying up to an additional $10 million in Allowable Dividends) or a waiver agreement with the creditors permitting the dividend payment in excess of what would be allowed under the indenture.

Please note that the $70 million Q4 2017 dividend was funded by the proceeds from the NSAL Term Loan B originated during November 2017. NM was desperate for cash during Q4 2017, so NM forced NSAL to issue additional debt and to pay the maximum dividend possible at that date. NM sold assets throughout 2018 because it was desperate for cash. If there was any possibility of extracting more cash from NSAL rather than selling five vessels during 2018, NM would have forced NSAL to declare another dividend.

The takeaway from the calculation of the Estimated Allowable Dividend based on the Section 4.11 Restricted Payment language is that NSAL has little to no capacity to issue more dividends currently (barring a waiver with NSAL creditors which is highly unlikely due to NSAL's very high current leverage and its results since the Term Loan B was issued). Future dividends will depend on Consolidated Net Income. Please note, however, that only 50% of Consolidated Net Income will increase the dividends allowable under Section 4.11. In addition, NM only owns 63.8% of NSAL, so 36.2% of any future dividends declared by NSAL will go to its partners.

NSAL had $82.5 million of cash at Q3 2018 but it is not accessible by NM. NSAL's cash is consolidated into NM's balance sheet for GAAP purposes and it gives the illusion of liquidity at the NM level. DO NOT BE FOOLED. Cash balances at NM must be calculated on an unconsolidated basis.

NM Liquidity Crisis

The following table provides the Projected Cash @ Q1 2019 at NM and it is included in "Preferred Tender Price Increase Analysis" article referenced above. Please note that this is an unconsolidated number, i.e. it excludes the cash at the NSAL level.

Q1 Ending Cash Balance Projection
Projected Cash @ Q4 2018 $60.0
Ship Note & Senior Secured Coupon Pmts During Q1 $40.0
Tender Offer Cash Payment - 66 2/3% Series G and H tendered $15.4
Credit Facility Prin Pmts $4.0
Environmental Fine $2.0
CFFO before WC Changes Q1 $-
CapEx 0.5
Projected Cash @ Q1 2019 $(1.9)

NM is very poor financial condition and, as discussed in prior articles, the attempted Tender Offer for the Series G and H Preferred would consume desperately needed cash. Please note that CFFO before WC Changes of $0 is a very generous assumption based on the quarter-to-date dry bulk rates. Barring a meaningful recovery in rates, CFFO before WC Changes is more likely to range between a negative $5 and $10 million.

Conclusion

The recent collapse in dry bulk rates will rapidly push NM to the edge of the default precipice if it persists through the end of the quarter. It is a very real existential crisis for NM and this is reflected in the Ship Notes trading at 54.27% of par (see prior articles for the discussion of this point). Serious financial and legal impediments exist to the completion of the TO. Preferred investors should take advantage of the current market prices of the Series G and H and sell as many shares as the limited trading liquidity allows. The common stock should be avoided.

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.