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Dry Bulk: A Case Study

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By Hohum77
August 24, 2009

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In 2009, many Dry bulk shipping companies have raised cash, but the purpose has been to meet bank requirements, purchase 2nd-hand vessels, or to build a war-chest.  Only one US-listed company has actually acquired new vessels in 2009- Navios Maritime (NM).

Up until mid-2008, Dry bulk shipping companies could place vessel orders with shipyards with a low down-payment, and worked on the full financing details (milestone payments) later.  That worked while shipping rates were high, and market conditions were good (concept sound familiar??).  The price of "near-new" (< 5 years old) vessels actually increased from mid-2006 thru mid-2008, and this helped inflate some company books. Actually, I'd say many Dry bulk shipping company books still show these overinflated assets.

Disclaimer: I own some NM shares.

NM has completed a few vessel acquisitions this year - In Feb 2009, acquired an Ultra Handymax (58k DWT) vessel for $73.5M - In June 2009, acquired 4 Cape (180k DWT) vessels for $325M - In July 2009, acquired a Cape (180 DWT) vessel from itself (I'll explain this shortly) - A few days ago, NM announced Q2 results, and included one big news surprise-  the company just added two more newbuild Capes to its fleet for ~$142M.

Time for some background info. Navios Maritime is one of those complex entities. It has - A decent sized fleet of its own. - It has charter-in vessels to supplement its fleet (some LT, some ST- currently only LT). - It has a major stake in a Shipping MLP affiliate, Navios Partners (NMM).  - It has a smaller stake in another Shipping acquisition affiliate. - It has upstream river transportation assets. - It owns port facilities. - It participates in Contracts of Affreightment (COA) - As mentioned before, it has acquired 6 newbuild Cape vessels in the last two months.

Ok, let's tackle the July Cape, Navios Bonavis, issue. The vessel was originally ordered by NM, but supposed to be delivered to NMM. The MLP would have struggled to manage financing, so NM offered them a smaller vessel in exchange for cash,  and down the road, NMM has the option to acquire the vessel. Why does NM do this? 1. NM owns a major chunk of NMM, which pays a hefty distribution, which covers more than 50% of NM's dividend. Keep the young tyke steady (NMM has been trading < 2 years) 2. More financing options are available, and are more fungible, when an entity has 14 Capes on order (8 of their own, 6 via acquisition)

Financing for new acquisitions is nearly non-existent, so how does NM manage these deals?  - The individual Ultra Handymax deal was funded with $40M cash and a 3-yr convertible bond. - The first set of 4 Capes were the result of a distressed situation, and a bank provided a huge chunk of financing-  $240M of financing. NM also issued mandatorily convertible preferred shares for part of the financing, and some cash to cover the deal. - The latest deal was funded in a similar fashion, except NM had to arrange the debt financing piece.  The convertible preferred shares and cash cover about 46% of the purchase.  Would you loan to someone if they covered 46% of the purchase price of the asset?  Better yet, each of the vessels has a 10-12 year charter upon delivery.

FWIW, NM has over $240M in cash and makes a case for offering the preferred vs issuing common stock.  So who purchases the preferred shares? For the latest acquisition, the answer surprised me a little - 2/3 of the preferred shares went to the former owner, 1/3 to the shipyard.  In other cases, banks (from earnings call.)

There's some points in the thought translation that lost me, but there's some other good macro points discussed in the earnings call- financing, iron-content in Chinese ore,  OECD recovery, mining companies involved in shipping, etc.

http://seekingalpha.com/article/157369-navios-maritime-holdings-inc-q2-2009-earnings-call-transcript?source=yahoo

Y'all will also need this as a reference to follow along http://www.navios.com/InvestorRelations/default.asp

�Hohum