Thursday, October 22, 2009

Innovative use of capital markets for Navios Maritime

Angeliki Frangou has been outperforming her Greek peers in innovative finance for her opportunistic expansion and aggressively picking up distressed assets in the dry cargo market. Her use of "mandatory convertible preferred shares" in the recent purchases of Capesize newbuildings lessens the leverage risks for Navios and avoids dilution. She succeeded in raising US$ 374 mio new equity for NMM at a minimum discount. Her US$ 375 bond issue to cover new buildings and debt is smart finance.

Frangou's strategy to buy a mature dry bulk company with a cargo system was quite different from her Greek peers, who started up with block vessel purchases on a vessel-provider model and scaled up on the same basis, using bank debt and raising new equity at discount. Scaling up at the top of the market prices led to sizeable losses for many listed companies with asset impairment charges and protracted negotiations with senior debt lenders for asset coverage covenant violations. Several companies were compelled to raise additional capital by massive 'at the market share issues' (ATM) that were highly dilutive. Jumping the gun in scaling up, many are now quite limited to expand their fleets at today's lower asset prices.

Initially there were issues about what direction the new Greek management under Frangou would lead Navios; but this year Frangou has been outperforming all her Greek peers in share price recovery. Whilst Navios (NM) peaked in early June, Navios Partners (NMM) surged in August when her Capesize deals attracted a lot of attention and NMM has continued to outperform NM, albeit NM has also been holding its own.

The use of convertible shares allowed Navios effectively to do the Capesize acquisitions at a discount to the nominal value. Navios funded US$ 47.9 mio of the purchase price in convertible shares. Two-thirds of the convertibles went to the previous owner and one-third to the shipyard.

Navios shares were trading at US$ 4.45 per unit at the time the deal was announced. When it comes time for the paper to be converted into Navios common shares, they will do so at no less than US$ 10 each. And they could fetch as much as US$ 14 under better circumstances. In either case, Navios gets more buying power than it would have at its current share price. Putting it another way, instead of paying about US$ 71 mio each for the Capesizes, Navios would pay only US$ 57.8 mio each if the shares convert at US$ 10. If Navios's common share does better in the meantime, however, and conversion comes at $14 each, Navios would pay only US$ 54.6 mio for each ship.

The structure also lessens the level of dilution that would occur if Navios just sold shares today to pay for the purchase. Under most circumstances, the preferred shares do not become common units for at least three years and that is in the more favorable US$ 14 scenario. Under the base-case US$ 10 conversion, they become common units five years (30%) and then 10 years from now (70%).

Navios AA rating and good track record allow them to tap the high yield market in a period of tight bank finance conditions and low interest rates. Whilst the equity buyers for recent ATM issues by weaker peer companies have been largely individual or "retail" investors, high-yield investors tend to be large institutions more fussy about where they place their money.  The offering will provide extra funds to pay for the purchase of two new vessels set for delivery in late 2009 and early 2010. It will also help cover debt on existing loans.

Navios is concentrating heavily on Capesize tonnage and expanding very aggressively. This carries risks if dry bulk recovery in the coming years is less robust than expected, but Frangou has been very prudent in fixing the new acquisitions with good charter cover and posturing her fleet with secured income. The use of use of convertible notes and bond finance is good financial posturing.

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