The outlook revision reflects what we view as difficult trading conditions in the product tanker shipping industry, which have prompted us to revise our charter rate assumptions for 2012-2013 downward. We believe the pressure on Navios Acquisition's earnings and credit measures has increased, given the uncertain industry outlook and the company's higher debt due to the recent acquisition of new vessels. We now see a risk that Navios Acquisition's credit measures may not improve to a rating-commensurate level in the near to medium term.
According to our revised base-case scenario, Navios Acquisition's credit measures will gradually improve over 2012-2013. However, we believe they could remain below our guidelines for the rating: ratios of adjusted funds from operations (FFO) to debt of 9%-12% and adjusted debt to EBITDA of 5x-7x. We previously anticipated the recovery of credit metrics to rating-commensurate levels by 2013.
The delayed recovery could, in our view, result from potentially weaker-than-expected charter rates and Navios Acquisition's debt-funded acquisition of three new medium-range product tankers for about $107 million. The company has already assumed about $75 million of debt for this transaction in 2012, while the vessels will start generating cash flows only after delivery, largely during the second half of 2014.
We note that 2012-2014 will remain an expansion period for the company; therefore the credit measures are distorted by cash flow and debt mismatches. We forecast, for example, that in 2012 Navios Acquisition's actual ratio of adjusted FFO to debt will be about 5%. This compares with a pro forma ratio of about 9% if the proportionate EBITDA contribution from vessels that are not in the water, but have been financed with debt, is included. Our base-case forecast is that the company's credit ratios will improve to rating-commensurate levels by 2014. We consider 2014 to be a more representative year for Navios Acquisition's credit ratios than 2012 or 2013 because all but three of the vessels to be delivered would have been operating, and therefore generating cash flows for 12 months.
Under our base-case operating scenario, we assume a sustained but moderate recovery of charter rates from 2012 and an increasing number of vessel-available days as new tankers enter the fleet. We estimate a resulting improvement in Navios Acquisition's EBITDA to $145 million-$150 million in 2014, from $135 million-$140 million in 2013 and about $105 million in 2012. We take into account Navios Acquisition's high level of contracted revenues, which provide good earnings visibility and consequently downside protection. As of March 31, 2012, 89% of Navios Acquisition's vessel-operating days were fixed for the remainder of 2012, 62% for 2013, and 54% for 2014. We understand that the average charter rates in these contracts are well above Navios Acquisition's cash flow break-even rates (including capital repayments).
We also forecast that Navios Acquisition's debt will slowly decline from 2013, after peaking in 2012, assuming that it makes no additional investments in new vessels beyond the current new-build program of about $210 million, with vessels to be delivered in 2012-2014. We therefore assume it will use discretionary cash flow for debt repayment. We nevertheless believe that the pace of deleveraging and, hence, improvement in cash flow measures that Navios Acquisition can achieve is closely linked to future charter rate performance, which we view as uncertain given structural overcapacity in the industry and the slowing growth of the global economy and, potentially, oil demand.
The rating on Navios Acquisition continues to reflect our view that the company's business risk profile is "weak", constrained by the above-average industry risk of the tanker shipping sector and the company's aggressive growth strategy. The rating is also constrained by our view of Navios Acquisition's "highly leveraged" financial risk profile and currently weak credit measures.
We consider these risks to be partly offset by Navios Acquisition's conservative charter policy, competitive break-even rates, and adequate liquidity. Our rating reflects Navios Acquisition's stand-alone credit quality. Although the company is partly owned by and shares links with Navios Maritime Holdings Inc. (BB-/Stable/-), these companies have different shareholder groups and are separately listed. Furthermore, management has informed us that, financially, each company is to operate on a stand-alone basis.
Liquidity
We assess Navios Acquisition's liquidity as "adequate" under our criteria (see "Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers," published on Sept. 28, 2011, on RatingsDirect on the Global Credit Portal). We consider Navios Acquisition's liquidity profile to be sufficiently supported by its liquidity sources (cash and available committed credit lines), strategy of prefinancing vessels on order, and ability to generate operating cash flows.
Our base-case liquidity assessment reflects the following factors and assumptions:
- We expect the company's liquidity sources (including operating cash flows, surplus cash balances, and committed bank financing for new-builds) will exceed liquidity uses (capital spending and mandatory debt repayments) by at least 1.2x over the next two years;
- Liquidity sources will continue to exceed uses, even if EBITDA were to decline 15%;
- The company appears to have sound relationships with its lenders; and
- We understand that Navios Acquisition was in compliance with its value-to-loan financial covenants as of March 31, 2012. We note that the company can prevent a potential breach by repaying debt to increase headroom under these covenants.
Our base-case operating scenario estimates that as of March 31, 2012, Navios Acquisition had about $77 million in cash, of which $40 million was a minimum liquidity requirement as stipulated in the bank documentation. It also had about $60 million of availability under $120 million in credit lines with Navios Maritime Holdings Inc (the largest shareholder) and Cyprus Popular Bank, due for extension in 2014. In addition, as of March 31, 2012, Navios Acquisition had about $128 million of secured committed vessel financing. Furthermore, the company will likely generate about $55 million of operating cash flow in 2012 and $75 million in 2013, according to our base-case scenario. Navios Acquisition's liquidity sources compare with liquidity needs for the remainder of 2012 of about $10 million for mandatory debt repayments, about $52 million in equity payments for new-build ships, and about $7 million for dividend payments.
We note that Navios Acquisition's vessel new-build program, amounting to about $210 million as of March 31, 2012, with vessels to be delivered in 2012-2014 about 75% funded with prearranged committed bank lines. Furthermore, the company has a manageable debt maturity profile, with a total of $50 million-$60 million in mandatory amortization payments over 2012-2014 and no major debt amortization payments (including repayment of credit lines) before 2017, when its $505 million secured bond matures.
Recovery analysis
We have equalized the issue rating on Navios Acquisition's $505 million first-priority ship mortgage notes due 2017 with the long-term corporate credit rating. This is because of the negligible level of priority liabilities in the company's capital structure that rank ahead of the notes.
The notes are secured by first-priority ship mortgages on seven VLCCs (very large crude carriers) owned by certain subsidiary guarantors and by other associated property and contract rights. The notes also benefit from a guarantee from the company's direct and indirect subsidiaries. The guarantee from those subsidiaries that own mortgaged vessels included in the notes' collateral is a senior guarantee.
The notes' documentation includes a relatively standard string of covenants for an issue of this nature. These include a change-of-control clause; limitation on incurring debt, subject to a fixed-charge coverage ratio of 2x; restricted payments; as well as limitations on asset sales, mergers and consolidations, and transactions with affiliates.
Outlook
The negative outlook reflects our view that, given the uncertain trading conditions, Navios Acquisition might be unable to improve its credit measures to a rating-commensurate level in the near to medium term. We believe a downgrade would primarily stem from a prolonged weakness in the product tanker shipping industry, absent prospects for a sustained recovery in charter rates from 2012. Continually weak industry conditions would likely prevent Navios Acquisition from achieving favorable employment for vessels not yet delivered and contracted, and those up for recharter. They would also hinder the company from earning a profit-share income from the employed vessels, resulting in continually weak credit measures and potential liquidity pressure.
Moreover, rating pressure could arise if Navios Acquisition's debt were to increase on account of additional investments in new vessels beyond the current new-build program. Our base-case operating scenario estimates that the company's debt will decline slowly from 2013 and that its cash flow measures will show a gradual improvement to rating-commensurate levels in the near to medium term, such as a ratio of FFO to debt of 9%-12% and debt to EBITDA of 5x-7x. Nevertheless, we might consider lowering the rating if we saw clear signs that Navios Acquisition's performance were not in line with what we had anticipated.
We could revise the outlook to stable if we observed a gradual market recovery and considered the company's cash flow measures to be sustainably commensurate with the rating. Furthermore, an outlook revision to stable would be subject to our assessment of a continued, adequate liquidity profile, manageable covenant compliance tests, and reasonable expansion plans.
Source: S&P Ratings