Shipping Co. Navios Maritime Partners Senior Secured Debt Rating Raised To #B+#; #B# Issuer Rating Affirmed

Stocks and Financial Services Press Releases Tuesday August 1, 2017 17:26
FRANKFURT--1 Aug--S&P Global Ratings

FRANKFURT (S&P Global Ratings) Aug. 1, 2017--S&P Global Ratings today raised its issue rating on Marshall Islands-registered dry-bulk and container shipping company Navios Maritime Partners L.P.'s (Navios Partners') senior secured term loan to 'B+' from 'B', and revised the recovery rating upward to '2' from '3'. The '2' recovery rating indicates our expectation of substantial recovery prospects (70%-90%; rounded estimate 75%) in the event of default.

We also affirmed our 'B' long-term corporate credit rating on Navios Partners. The outlook is stable.

We raised our issue rating on the company's senior secured term loan B to reflect our view of improved recovery prospects, following the addition of seven dry-bulk vessels to the fleet (of which four vessels were added and two older vessels were removed from the term loan B collateral) and about 20% improvement in the fair market values of the dry-bulk vessels that are part of the collateral, as compared to our last review in March 2017. This, together with vessel acquisitions being partly funded with cash and our view of continued gradual recovery in the dry-bulk shipping industry, results in our expectation of higher recovery prospects for the term loan B amounting to $453 million, including the proposed $53 million add-on. The collateral after the add-on issue will include first-lien security on 29 vessels (including seven containerships and 22 drybulkers).

Furthermore, we understand that the new vessels and improvement in the fair market value of the fleet will expand Navios Partners' headroom under its loan-to-value (LTV) covenant, as stipulated in the term loan B's documentation, to about 20% (from 10% previously) at the transaction's closing. We continue to believe that the company could face tight headroom under the LTV covenant if--contrary to our expectations--asset prices do not hold or improve in tandem with easing industry supply pressure and improving charter rates in the dry-bulk shipping sector.

In addition, while the vessel acquisitions will be partly funded with cash, we expect Navios Partners will maintain an adequate liquidity cushion underpinned by its ability to generate excess cash flows (supported by the suspended dividend distribution). In the 12 months from June 30, 2017, we forecast that Navios Partners' ratio of liquidity sources to uses will be about 1.3x (excluding Navios Maritime Containers Inc. [Navios Containers]).

Formed in 2007, Navios Partners is listed on the New York Stock Exchange and owns and operates a fleet of 37 dry-bulk vessels and container ships, including 30 small to large dry-bulk carriers with a total carrying capacity of about 3.6 million deadweight tons, and seven container ships that total 50,400 20-foot equivalent units. Navios Partners generated about $107 million of adjusted EBITDA last year and had adjusted debt of about $529 million as of Dec. 31, 2016.

We acknowledge that the additional vessels will enhance Navios Partners' fleet profile in terms of size and age. However, we consider this insufficiently material to revise our view of the business risk profile. Our assessment remains constrained by Navios Partners' relatively narrow scope and diversity, with a focus on the oversupplied dry-bulk and container shipping industries and a fairly concentrated and low-quality customer base. We also believe that dry-bulk and container shipping sectors have less favorable characteristics in general, compared with those for oil and gas shipping. This is because the credit quality of the oil and gas shipping sectors' customer base is stronger. That said, dry-bulk and container-ship time charters are typically fragile, and we continue to observe more charter defaults on those contracts than in other shipping segments.

The key credit support to Navios Partners' competitive position comes from its time-charter profile, with the average charter duration at 2.4 years as of July 27, 2017. Furthermore, Navios Partners benefits from its competitive and predictable cost base. As of July 27, Navios Partners had chartered out about 88% of available days for 2017 and about 34% for 2018 (including index-linked charters). Normally, this would add to earnings visibility, provided the charters honor their original commitments, but we note that this might not be the case for Navios Partners. This is because the weak credit standing of Navios Partners' crucial counterparties under the long-term charter agreements, namely the South Korean container liner Hyundai Merchant Marine Co., Ltd. (accounts for about 30% of Navios Partners' EBITDA in 2017 under our base case) and Taiwanese container liner Yang Ming (about 20%), inevitably poses a risk of amendments to the existing contracts and ensuing strain on Navios Partners' cash flows.

We forecast that the partly debt-funded vessel acquisitions would likely moderately weaken the company's credit metrics. However, the increase in debt is largely counterbalanced by our upward revision in dry-bulk shipping rates, and therefore we expect that S&P Global Ratings' average adjusted funds from operations (FFO) to debt will remain in the 14%-15% range and adjusted debt to EBITDA in the 4.5x-5.0x range in 2017-2018, which is consistent with our financial profile assessment. We do not factor Navios Containers into these credit ratios at this stage, given the uncertainty over its future capital structure and ownership composition. Furthermore, our understating is that Navios Partners intends to dilute its equity stake in Navios Containers to below 50% from the current 60%.

In general, Navios Partners' financial profile reflects the prolonged depressed charter rate conditions and the company's relatively high debt,which mirrors the underlying industry's high capital intensity and the company's track record of large, partly debt-funded, expansionary investments and dividend distributions.

We assess Navios Partners based on our approach outlined in "Master Limited Partnerships And General Partnerships," published Sept. 22, 2014, on RatingsDirect. We consider that Navios Partners does not constitute a group

with a lower-rated Navios Maritime Holdings Inc. (Navios Holdings), given our opinion that the default risk of these entities is differentiated. We believe Navios Holdings exercises meaningful ongoing control and influence over Navios Partners through its 100% control of Navios GP LLC, Navios Partners' general partner. We currently consider the strategic and financial interests of Navios Holdings and the other unitholders in Navios Partners to be aligned. Third parties own a material percentage (80%) of Navios Partners' units. Furthermore, unitholders elect four of the seven members of Navios Partners' board of directors. We understand that this is the key reason for Navios Holdings not consolidating Navios Partners in its accounts under U.S. generally accepted accounting principles.

The stable outlook on Navios Partners reflects our view that charter rate conditions in dry-bulk shipping will continue to gradually improve and Navios Partners will maintain a rating-commensurate credit profile and liquidity over the next 12 months, underpinned by its medium-term time charter profile and competitive and predictable cost structure.

Given the inherent volatility of the shipping sector, we view the company's maintenance of adequate liquidity coverage of at least 1.2x and manageable LTV covenant compliance tests, supported by available ample cash for early debt prepayments to ensure compliance if needed, as important contributors to a stable outlook.

We could lower the rating if, unexpectedly, the vessel values and, therefore, LTV covenant headroom appeared to significantly diminish, translating into an inevitable, large cash drain on Navios Partners to prepay the loan and prevent LTV covenant breaches. A downgrade would also be likely if the company made further and largely debt-funded vessel acquisitions, resulting in adjusted FFO to debt weakening to below 12%.

Rating pressure would also materialize if the company's EBITDA trends significantly below our base-case forecast. Our rating incorporates a gradual recovery in dry-bulk rate conditions and potential moderate amendments to charter agreements, given that the container-ship rates embedded in Navios Partners' charter agreements exceed the current market rates. This means that Navios Partners' earnings and, consequently, liquidity would come under pressure if the company faced higher-than-anticipated cyclical pressure on dry-bulk and container-ship charter rates and was forced to make material amendments to existing charter agreements.

We could raise the rating if we observed marked industry recovery, if the risk of charter amendments materially diminished, and if we believed that the company sustained a comfortable level of headroom under its LTV covenant so

that the risk of a large cash drain, and the ratio of liquidity sources to uses falling below 1.0x, is remote. An upgrade would also depend on Navios Partners' ability to realize EBITDA of at least $120 million, accompanied by gradual debt amortization, to achieve core credit ratios commensurate with a 'B+' rating. Specifically, such ratios would include adjusted FFO to debt of 15% or higher and adjusted debt to EBITDA below 5.0x on a sustainable basis.

An upgrade would also depend on our belief that the company will pursue a balanced financial policy once it resumes dividend distribution, while investing in additional tonnage.

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