Navios Maritime Acquisition Corporation (NYSE:NNA) is a financially troubled microcap company that owns a fleet of VLCC crude tankers and LR and MR product tankers. NNA is extremely risky as a trade or an investment from either the short or long side. Due to its small equity market value relative to its enterprise value and small float relative to outstanding shares, NNA is a highly volatile stock and can experience extreme price swings.
NNA is a 35.8% owned subsidiary of Navios Maritime Holdings, Inc. (NYSE:NM), and an affiliate of Navios Maritime Partners L.P. (NYSE:NMM) and its subsidiary Navios Maritime Containers L.P. (NMCI). It is an affiliate and joint venture partner in Navios Europe I and II. Prior articles analyzing NNA are available here and are a must-read primer to understand the following analysis. Particular emphasis should be placed on reading the following:
- Navios Maritime Midstream Acquisition Deep Dive Part I
- Navios Maritime Midstream Acquisition Deep Dive Part II
- Navios Maritime Acquisition Corporation: The End Draws Nigh
- Navios Maritime Acquisition Corp.: Weak Q4 Earnings And Cash Flow Despite Better Rates
- Navios Maritime Acquisition: More Leverage, Shady Asset Swap, Liquidity Issues Continue
This article will focus on the Q1 2019 Earnings Release.
Q1 2019 EBITDA
Q1 2019 EBITDA was $41.66 million. Q1 2019 VLCC rates were significantly better than Q1 2018, as illustrated in the graph on page three of Allied Shipping's Week 19 update, and a full quarter of Navios Maritime Midstream Partners' (NAP) results were consolidated into the results after the completion of the buy-in of common units late Q4 2018. This resulted in a robust year-over-year comparison. Q1 EBITDA will likely be the second highest for the full year 2019 with only the seasonally stronger Q4 possibly exceeding this mark.
The same graph in the Allied Shipping update, cited above, that shows the year-over-year performance of VLCC rates also shows a steep drop in VLCC rates from Q1 to Q2 2019. A separate graph illustrates the Q1 to Q2 decrease in MR rates. NNA has significant negative day rate exposure during Q2 and Q3 due to six floating rate LR1s, three floating rate VLCCs, four VLCCs with profit sharing, and 11 MRs with base rates plus profit sharing. Put another way, more than 80% of NNA's vessel capacity on a DWT basis is exposed to rate swings.
Vessel age is also an issue for NNA. The Company sold one VLCC (C. Dream, built 2000) and scrapped a second VLCC due to a catastrophic hull breach (Shinyo Ocean, built 2002) during March/April. Both of these vessels were candidates for scrapping due to age (as discussed in prior articles). The removal of the C. Dream and Shinyo Ocean from operations will reduce Q2 EBITDA by roughly $3 million alone and reduced NNA's DWT capacity by 11%. DWT capacity is an imperfect measure of relative earnings capacity, but it does illustrate how the loss of two vessels is more important than it may seem on the surface.
NNA is also confronted by the impending 17.5 year SS/DD for the Nave Electron (2002) and is facing the May TC rolloff of the Nave Celeste (2003). The Nave Electron will likely be sold to a third-party since it will save the cost of the SS/DD and the installation of BWTS and likely could be sold for a premium over scrap value (although day rate discounts for older vessels, the likely increase in 2020 fuel costs due to efficiency differences with younger vessels, and the cost of the BWTS need to be factored in). The sale of the Nave Electron will not happen during Q2, though it needs to happen early enough in Q3 for the buyer to have the vessel out of Drydock and back in operation for the seasonally stronger Q4. NNA will then face two 17.5-year SS/DD during 2020 on the Nave Celeste and Nave Neutrino. The downward pressure on earnings will continue during 2020.
All of the above factors mean that significant downward pressure will exist on NNA's EBITDA for Q2 and Q3 2019. Barring a marked bounce back in VLCC rates, Q2 EBITDA will be below $30 million and may breach $25 million.
Putting NNA's Debt Burden and EBITDA in Context
NNA had $1.2 billion of debt at Q1 2019, a $327k increase from Q4 2018 despite the $41.66 Q1 EBITDA. There were factors that contributed to NNA's inability to reduce its debt a bit during a supposedly "good" quarter that "met expectations", including NM's aggressive management of the inter-company Accounts Receivable and Accounts Payable (discussed further below) and its insistence on paying a common stock dividend. Still, the static debt level tells an ugly tale. With the sale and scrapping of the C. Dream and Shinyo Ocean, debt would decline by less than 3% ($34.25 million repayment of the NAP Term Loan B per page 5 of the slide presentation) while DWT would decline by 11%, meaning debt per DWT of capacity would increase significantly.
NNA's debt per DWT ton for all owned vessels as of Q1 2019 was approximately $250 per ton. VLCCs represent approximately 70% of NNA's remaining fleet on a DWT basis. NNA's owned VLCCs are approximately 11.5 years old on average. A 10-year old 300k DWT VLCC is worth approximately $45 million (per the most recent Compass Marine estimate) or $150 per DWT. Adjusting for age, NNA has $100 more debt per DWT than the vessel is worth. NNA is woefully over-levered and a "good" quarter that "met expectations" did nothing to address the leverage issue. In fact, on a debt per DWT capacity basis, it became worse.
Let's assume that Q2 and Q3 EBITDA is $25 million per quarter and Q4, despite the fleet shrinking by three VLCCs or approximately 15% when compared with Q1, is able to achieve $42.5 million of EBITDA (a 20% increase adjusting for the decrease in DWT). That yields FY EBITDA of $134 million.
Interest expense for Q1 was $22.9 million. Because of the timing of cash flows during the year, debt is likely to increase during Q2 and Q3 so full-year interest expense is likely to fall between $92 and $95 million. Principal payments on the sale leasebacks, credit facilities, and the Term Loan B financing will likely exceed $10 million per quarter (the big variable will be the amortization terms for the NAP Term Loan B refinancing). Principal plus interest debt service may therefore fall between $132 and $135 million. Based on these assumptions, EBITDA would barely cover debt service for the FY 2019. NNA will not generate sufficient cash to fund the $16+ million in annual common stock dividends or any CapEx or SS/DD costs (see below for discussion).
NNA's Liquidity Covenant test is $40 million under its credit facilities. Cash at Q1 2019 was $67.9 million. Restricted Cash was $25.2 million ($21.75 million from the sale of the C. Dream) per Footnote 1 on page 9 of the Q1 Earnings Slide Presentation. Unrestricted Cash was therefore $42.7 million. NNA passed the Liquidity Covenant test but barely.
May 15th Coupon Payment of 8 1/8% Ship Notes of $27.2 million was mostly funded from the approximately $20 million in net proceeds of the Sale Leaseback financing. Read "More Leverage, Shady Asset Swap ..." for a detailed analysis. NNA will need to sell more assets or borrow more money to meet the Q2 and Q3 cash flow burn.
Inter-Company Accounts Receivable and Accounts Payable
As discussed in this recent article on NM titled "NSAL Cash Stripped In Questionable Deal", NM was in serious jeopardy of failing its Q1 Liquidity Covenant test (amongst other covenant tests). NNA's Due From Related Parties - short-term (Accounts Receivable from NM) increased by $18.8 million from Q4 to Q1, i.e. NM was not paying its bills. Due to Related Parties, short-term (i.e. amounts due to NM) decreased by $11.36 million (the ending balance was a mere $661k) as NM stripped cash from its subsidiaries. This was a $30 million liquidity swing to the benefit of NM as AF desperately battled to keep NM from defaulting at the end of Q1. Note that any payments made by NM 90 days prior to bankruptcy can be clawed back (the inter-company nature of this Accounts Receivable could expose NNA to a longer clawback period). In short, NNA will be increasingly at risk for any Accounts Receivable owned by NM as it teeters towards bankruptcy. NMM did not provide a similar level of detail in its Earnings Release so an analysis on its inter-company accounts has to wait for the 6-K filing.
Further analysis on NM's fraught financial position will need to wait until the Q1 Earnings Release (not yet scheduled). Will NM pay some of the $37.7 million of Due From Related Parties - Short-term accounts receivable on NNA's books? I would be very cautious in assuming it will pay even a meaningful percentage during Q2.
NAP Term Loan B Refinancing
As discussed extensively in the article "More Leverage, Shady Asset Swap ..." cited above, NAP was in danger of failing the Interest Coverage Ratio Covenant test at the end of Q1. NAP financial statements were not provided in the Earnings Release, so further analysis will need to wait for the NNA 6-K filing. Of note however is NNA's disclosure that it has arranged a $105 million refinancing of a portion of the Term Loan B, subject to documentation, and is working on refinancing an additional $60 million portion of the Term Loan B (see page 5 of the slide presentation).
As discussed in the prior article, even if NAP avoided defaulting on the Interest Coverage Ratio Covenant during Q1, it would certainly fail during Q2. With the imminent technical default and a June 2020 Term Loan B maturity, NNA has to get this refinancing closed. If NNA is not able to obtain acceptable financing for the last $60 mm, will the new creditors close $105 million financing and risk a default on the $60 million stub portion of the Term Loan B? I don't think any lender creditor committee would take that risk. Would the Term Loan B creditors provide a waiver? Not after the shady asset swap. NAP may not have any choice but to sell assets to repay the stub portion of the Term Loan B in order to close the $105 million financing. Pay close attention to this. I think this will be more complicated than NNA is acknowledging.
If NAP successfully refinances the Term Loan B, the debt service will increase dramatically because the principal amortization will leap from .25% of the original face value of Term Loan B, about $512k per year, to something closer to 5%, perhaps more, of the $160 million principal outstanding after the paydown of the Term Loan B with the proceeds from the sales of the C. Dream and Shinyo Ocean. With the Kieran and Saowalak swapped to NNA and the C. Dream and Shinyo Ocean sold, NAP's revenue and gross margin are going to decline precipitously, and it is going to be very difficult for NAP to cover debt service and meet any reasonable set of Financial Covenants imposed by the new financing.
Any More Debt Refinancing Rabbits in the Hat?
At Q1 2019, NNA had about $194 million of outstanding Credit Facility loans spread over six creditor groups. These are the only outstanding Credit Facilities that can be refinanced with the hope of increasing leverage and netting some additional liquidity. The remainder of the non-NAP assets were already refinanced with sale leasebacks during March 2018 and March/April 2019 or are pledged to the Ship Notes.
Is there really any juice left to squeeze out by refinancing these six Credit Facilities? My assumption is that the best assets (the assets with a FMV in excess of the related debt) were the ones refinanced in the two sale leaseback transactions, a necessary precondition to NNA harvesting needed cash in those two financings. The six Credit Facilities are secured by three LR1s, four MR2s, two small chemical tankers (Cosmos - 2010 and Polaris - 2011), the VLCC Spherical (2009), and two vessels I could not identify but that are very unlikely to be VLCCs. Several of these Credit Facilities were originated during 2010 and 2011 and will mature during 2020.
A 10 year old VLCC is worth $45 million. 10-year old LR1s and MR2s are worth $17 to $18 million, so about $122.5 million for the 7 that NNA owns. The two chemical tankers are optimistically valued in the range of $18 million each or $36 million. This totals to $203.5 million. If we assume that the two unidentified vessels are LR1/MR2s and assign a $20 million valuation to each, the total estimated FMV would equal approximately $243.5 million. This is probably a bit generous and there are some assumptions underlying the estimated FMV, but it serves as a decent analytical starting point.
New creditors are unlikely to finance more than 75% of the FMV for a highly levered B3 credit. NNA's $194 million of outstanding Credit Facilities equals slightly under 80% of the estimated FMV of the pledged vessels. Based on this, there is not much additional leverage that could be added on these assets. $5 million? 10 million? It seems unlikely, but we will find out pretty quickly during Q3.
Euro I Partnership Hemorrhaging Cash
During Q4 2018, NM, NMM, and NNA increased the WC facility to Euro I by $30 million, from $24.1 million to $54.1 million. During Q4 2018, $18 million of the $30 million was drawn down. During Q1, NM and NNM disclosed that they funded another $4 million each to Euro I, leaving a mere $4 million of the incremental $30 million undrawn for a total of $50.1 million of principal outstanding on the WC Facility.
Accrued Interest on the WC Facility at Q4 2018 was approximately $15.4 million (this is an estimate since NM did not break out Accrued WC Interest in the short-term accounts receivable from Euro I), so total WC Principal and Interest due at Q4 from Euro I was approximately $57.5 million. Add the $8 million drawn down during Q1 and it was $65.5 million. The WC interest rate is 12.7% compounded on a quarterly basis resulting in an effective annual interest rate of 13.3%. If Euro I does not need additional WC during the remainder of 2019, the outstanding WC balance at December 30th, 2019, the earliest partnership liquidation date, would be around $75 million.
The big wild card will be if Euro I will require additional WC Facility increases. My guess is that it will due to higher principal amortization on the Senior Bank loan that was refinanced during 2018 (more on that in a subsequent article). I am anticipating a WC Facility outstanding balance, including accrued interest, in the neighborhood of $90 million and a Senior Bank Loan balance of at least $40 million on Euro I as of the earliest partnership liquidation date of December 30th, 2019.
In a prior article, I provided an estimate of the FMV of the Euro I fleet. The FMV estimate from that article was $110 million. At an estimated $130 million at December 30th, 2019, the Senior Bank Loan balance and the outstanding balance on the WC Facility are likely to exceed the FMV of the underlying vessels. This has two implications for NNA: 1) that the Term Loan to Euro I and the accrued interest on the Term Loan will be written off, 2) that some of the accrued interest on the WC Facility due to NNA at Q4 2018 will be written off and that the interest accrued during 2019 will be written off. This assumes a prompt liquidation at December 30th, 2019. If the liquidation occurs at a later date, the write-offs will be larger. At Q4 2018, NNA had a Euro I WC Facility principal balance receivable of $11.77 million and accrued WC Facility interest of $6.6 million.
NNA has stripped NAP's bones bare after the merger completed during Q4 2018: more than $40 million in cash and the best tanker assets were taken by NNA. Without the NAP merger, NNA would likely have defaulted on its debt obligations by now. NNA also aggressively refinanced its debt with two sale leaseback transactions during March 2018 and March/April 2019 to raise more cash. Despite all of this, NNA barely had the cash to make the May 15th coupon payment on the Ship Notes without defaulting on the Credit Facility Financial Covenants.
During the next 90 days, NNA will need to overcome the following hurdles:
- Q2 negative cash flow as tanker rates continue at current levels.
- Arranging the refinancing of the Term Loan B to avoid defaulting on the Financial Covenants at the end of Q2.
- Finding the capital to finance the upcoming SS/DD on its vessels to avoid selling another 10% of its fleet as measured by DWT.
- NNA being unable to collect A/R from NM.
- NM missing its interest coupon payment due July 15th and the knock-on effect it will have on its subsidiaries.
There are no cards left to play by AF at the NNA level. NAP has already been stripped. The NNA fleet has been levered as much as it can be. The liquidation of Euro I will not occur until December 30th, 2019, at the earliest, and even then the liquidation will only realize $10 to $15 million for NNA's coffers.
What is holding up NNA's stock price is the common stock dividend (that is being funded by increased debt and asset sales) and the belief the IMO 2020 regulations will have a positive impact on the economics of tanker fleets. When NM pitches into the financial abyss in July, there will be little incentive for NNA to maintain a dividend that it will need to sell assets to sustain (since its leverage is likely maxed out). Assuming that there will be significant financial benefits that accrue to NNA with the implementation of IMO 2020 (I am very skeptical that they can be of a magnitude to save NNA), the Company still has to survive until November when tanker rates begin to move up seasonally. NNA will best be able to do that by eliminating the dividend and selectively selling assets.
In the conclusion of my last article on NNA, I wrote:
The issue for NNA is that is woefully overleveraged and has been for years. I will provide a more complete financial analysis after the earnings release. For now, I will stick with my prior forecast:
Longer term, NNA will trade in a range between $1.29 and $3.25 by June 30, 2019.
Well, the earnings release is in, so it is time to update the forecast. I will stick with the stock price falling to the range of $1.29 to $3.25 (it traded down into that range after I first made the prediction). The June 30th date will be tight. Much will depend on what happens with NM and its earnings release. I will stick with June 30th until after NM releases its Q1 earnings, and I can assess how tight the liquidity noose has cinched around NM's neck (i.e., how much time it has left).
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.