Shipping And Logistics Company Navios Maritime Holdings Upgraded To #B# On Improving Financial Outlook Stable

Stocks and Financial Services Press Releases Friday May 25, 2018 17:20
FRANKFURT--25 May--S&P Global Ratings

FRANKFURT (S&P Global Ratings) May 25, 2018--S&P Global Ratings said today that it had raised its long-term issuer credit rating on Marshall Islands-registered shipping and logistics company Navios Maritime Holdings Inc. (Navios Holdings) to 'B' from 'B-'. The outlook is stable.

At the same time, we raised our issue rating on the company's senior secured debt to 'B' from 'B-'. The recovery rating on Navios Holdings' $650 million first-priority ship mortgage notes due in January 2022 remains unchanged at '3', reflecting our recovery expectations in the 50%-70% range (rounded estimate: 50%). The '4' recovery rating on the $305 million senior secured notes due in August 2022 remains unchanged and indicates our expectation of average (30%-50%) recovery in the event of a payment default (rounded estimate: 40%).

We withdrew our 'CCC' issue rating and '6' recovery rating on Navios Holdings' $350 million senior unsecured bonds due in February 2019.

The upgrade reflects Navios Holdings' improved cash flow generation and financial performance from the recovery in dry-bulk shipping industry conditions. Furthermore, cash flow uncertainty in the group's terminal/logistics operations has reduced now that Navios Logistics, a subsidiary of Navios Holdings, started to realize earnings from a major logistics contract with Vale S.A., following an arbitration tribunal ruling in favor of Navios Logistics. Under the 20-year take-or-pay contract with Vale, Navios Logistics will generate a minimum of $39 million in EBITDA in 2018 for transshipment, storage, and handling of iron ore via its port terminal in Uruguay, which provides significant earnings visibility, also because the contract stipulates annual inflation adjustment to tariffs.

Founded in 1954 as a subsidiary of U.S. Steel, Navios Holdings, which is listed on the New York Stock Exchange, controls a fleet of 72 dry bulk vessels (38 owned and 34 long-term chartered-in). Navios Holdings owns a 63.8% stake in Navios Logistics, one of the largest logistics companies in the Hidrovia region of South America, serving the storage and marine transportation needs of its customers through port terminal, river barge, and coastal cabotage operations.

We believe that the recovery in dry bulk charter rates in 2017 to an average of $14,000 per day (/day) for Capesize ships and $10,700/day for Panamax ships (from around $7,300/day and $6,300/day, respectively, in 2016) will continue in 2018. In our base case for 2018, we incorporate that the average rate for Capesize vessels will reach $18,000/day and $13,000/day for Panamax vessels. These figures largely correspond with the industry average rates seen so far in 2018, because of supporting industry fundamentals, most importantly:

  • Rising iron ore, coal, and grain ton-mile demand, in part, because China, the world's largest commodities importer, is bringing in additional volumes from more distant places than previously, such as Brazil and North America; and
  • A close to all-time low order book for dry-bulk ships and slowing global fleet expansion.

The rebound in dry-bulk charter rates will strengthen Navios Holdings' cash flow generation and trigger an improvement in the company's debt-servicing prospects. According to our base case, Navios Holdings could almost double its reported EBITDA (excluding dividends from affiliates) to about $200 million in 2018 from about $105 million in 2017. This, accompanied by the assumption of no major new debt incurred and debt amortization continuing as scheduled (to reach an adjusted debt of about $2 billion as of Dec. 31, 2018), points toward S&P Global Ratings-adjusted funds from operations to debt improving significantly to about 8% in 2018 (and about 12% in 2019) from 4% in 2017.

Furthermore, we forecast a turnaround of free operating cash flows (FOCF) to a firmly positive range in 2018, in part thanks to low expansionary capital expenditures after Navios Logistics completed the expansion of a port terminal in Uruguay, after years of negative performance. This creates a sufficient cushion for the company to avert a potential liquidity shortfall, as reflected in Navios Holdings' liquidity sources-to-uses coverage of about 3.0x in the upcoming 12 months.

The upward reassessment of our business profile mainly reflects Navios Holdings' enlarged exposure to more stable (compared with traditional dry-bulk shipping) terminal/logistics operations underpinned by the attractive contract with Vale. The Vale contract, combined with improved earnings from dry-bulk shipping, will drive recovery in absolute profitability and diminished volatility of profitability.

We continue to factor in the shipping industry's high risk, which stems from the industry's capital intensity, high fragmentation, frequent imbalances between demand and supply, lack of meaningful supply discipline, and volatility in charter rates and vessel values. We view as positive for the ratings:

  • Navios Holdings' competitive position, which benefits from its expanding and more predictable-than-traditional-shipping transportation and logistics business in South America;
  • Its holdings in affiliates, which pay dividends under normal operating conditions; and
  • Its solid reputation as a quality operator of a relatively young and cost-efficient vessel fleet, underpinned by good cost efficiencies and control, as reflected in below-industry-average daily vessel operating costs.

We consider that Navios Holdings' financial risk profile is now better positioned within our highly leverage category than previously, because of improved debt service prospects. The company's high adjusted debt reflects the underlying industry's high capital intensity, the company's track record of large expansionary investments, and a prolonged period of depressed charter rates, which ended last year.

We analyze Navios Holdings and the Marshall Islands-registered oil- and oil product shipping company Navios Acquisition on an integrated basis because of their linked business relationships. Navios Holdings owns 47.7% of Navios Acquisition. Crude tanker owner and operator Navios Midstream, 59%-owned unconsolidated affiliate of Navios Acquisition, also falls under the group credit profile (GCP) because of the entities' material business interactions, as signified by Navios Acquisition's extension of a de facto rate guarantee for Navios Midstream. We note that the entities share the same name; have overlaps in the management and board of directors; and share the same history and common business ties, with Navios Holdings being the commercial and technical manager of Navios Acquisition's and Navios Midstream's tankers.

The stable outlook reflects our view that Navios Holdings' FOCF generation will be positive this year (and in 2019) and its liquidity will stabilize in the next 12 months, thanks to gradually recovering dry-bulk charter rates, EBITDA expansion of Navios Logistics, and the company's competitive and predictable cost structure. It also reflects our view that our assessment of the GCP will remain unchanged.

An upgrade could follow if Navios Holdings' adjusted FFO to debt strengthens to above 12% and FOCF becomes positive, both on a sustainable basis. Such an improvement in adjusted FFO to debt would be possible if dry-bulk charter rates outperform our base-case forecast, while Navios Holdings gradually reduces debt. However, we consider a material debt reduction as unlikely in the next 12 months because opportunistic debt-funded vessel acquisitions by Navios Holdings are possible.

An upgrade would be also contingent on the GCP improving to 'b+', which would be possible if Navios Holdings' stand-alone credit profile (SACP) strengthens to 'b+' and the credit quality of Navios Acquisition and Navios Midstream does not deteriorate in the meantime.

We could downgrade Navios Holdings if the ratio of adjusted FFO to debt appeared to decline sustainably below 6%, due for example to an unexpected drop in dry-bulk charter rates markedly below our base case.

Furthermore, an unlikely material deterioration of Navios Acquisition's cash flow generation and liquidity, resulting in a downward revision of its SACP to 'ccc', would put pressure on Navios Holdings' creditworthiness.


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