Navios Maritime Partners LP (NYSE:NMM) a publicly traded subsidiary of general partner Navios Maritime Holdings Inc (NYSE:NM) and an affiliate of Navios Maritime Acquisition Corporation (NYSE:NNA), has significant counterparty risk to Yang Ming Marine Transport Company (“YM”), a financially troubled Taiwanese shipper, under two containership TCs with well-above current market rates. On April 21st, YM issued a press release indicating that trading in its stock on the Taiwanese Exchange would be suspended until May 4th and that “it would reduce its equity by 53%”. Frankly, I was a bit discombobulated by the phrase “reduce its equity” since I knew it was not in financial condition to repurchase stock. After five minutes I parsed that YM was doing a roughly 1 for 2 reverse stock split! The stock closed April 19th at 6.15 Taiwanese Dollars, or roughly $.20 at a $1/30.36 TWD exchange rate and it had an equity market value of approximately $608 million.
Reverse stock splits are typically an invitation for selling and shorting, particularly when accompanied by a suspension in trading. The resumption in YM trading on May 4th, unless accompanied by a positive restructuring announcement, will unleash a wave of selling pressure and it will complicate further equity raises to deleverage the YM balance sheet. The reverse stock split announcement, therefore, begged a closer look at YM to ascertain if the counterparty risk to NMM had increased.
Taiwanese Government Support
In my initial analysis of NMM’s YM counterparty risk on March 22nd, it appeared that a rescue by the government of Taiwan had already occurred per Company comments and industry articles. The Taiwanese government announced during November 2016 a US$1.9 billion rescue package, including loans at below market interest rates, to save Taiwanese corporations YM and Evergreen Marine from the severe downturns in the Containerships sector. YM announced in January 2017 its intent to participate in this rescue package.
In an April 4 letter to customers addressing its financial condition, YM confirmed the completion of an equity offering.
“Furthermore, pursuant to Yang Ming’s recent recapitalization plan, Yang Ming can confirm having raised US$54.4M in an offer of 161.33 million new shares to six investors. These new investors include institutions and private companies. They are: The National Development Fund of the Taiwan Government [“NDF”]; Taiwan Navigation Co.; Taiwan Chinachem; T3ex Global Holdings; Mercuries Life Insurance; and Superstar Investment. With respect to the NDF which was established by the Taiwan government (NYSE:ROC), this new investor will hold an approximate 6.39% stake in Yang Ming after the first round of issuance. Yang Ming anticipates the NDF will continue to invest in Yang Ming in subsequent rounds of issuance. The total shares of government-owned Yang Ming stock, including the holdings of the Ministry of Transport and Communications, will have increased to 36.62% after the completion of this first round.”
Interesting takeaways from the letter include 1) the 36.62% government ownership of YM post equity raise, 2) the lack of mention of closing any debt financing under the Taiwanese government rescue package and 3) the $54.4 million equity raise was less than the $62 million net income loss for Q4 2016 (see estimate of Q4 cash flow below). Q1 2017 experienced better Containership rates than Q4 2016 but these increases were unlikely to have improved results markedly from the Q4 $62 million loss.
In my March 22nd article, I proffered that YM “would likely be able to honor the remaining term of its TCs”. The TCs have 14 and 16 months remaining as of today. Based on the Taiwanese governments 36.62% ownership, its participation in the recent equity raise, and its commitment to a $1.9 billion total rescue package for YM and Evergreen, it still looks like YM will manage to perform under the TCs with NMM at least into Q3 maybe even Q4. But the 2016 financial statements clearly show that YM is in dire shape. The working capital deficit and the very high debt level (see below) raises the question of how much more financial assistance (debt and equity) the Taiwanese government is willing to commit without receiving concessions from Timecharterers like NMM.
YM did not provide a link to its financial statements for 2016 on its website, but, fortunately, the Financial Times has summarized the statements (sans explanatory footnotes). The numbers are pretty grim for parties with long-term credit exposure or equity investments. The salient points are as follows:
- Negative working capital of $568 million.
- Long-term debt of $2.37 billion.
- Interest expense of $65.5 million during 2016 (extremely low considering the debt load).
- 4Q 2016 negative cash flow of $32 million.
The near-term factor that pushes companies into bankruptcy or a negotiated restructuring is a liquidity crunch. The negative working capital of $568 million is the picture of such a crunch and it just seems insurmountable. It will also be further exacerbated by continued cash flow losses during the Q1 and Q2 of 2017. Even if YM was somehow able to reach cash flow breakeven during these quarters, the existing negative working capital appears to be a back breaker.
On the asset side, YM owns 106 vessels. 13 are 14,000 TEU vessels built in 2014 and 2015, but more than half of the remaining are between 9 and 20 years of age. In today’s market, 15 to 20 of the older, smaller vessels are prime scrapping candidates that would only realize $50 – 60 million in proceeds.
It is difficult to value the YM fleet without knowing how many have long-term contracts. As discussed in the March 22nd article about NMM, the MSC Christina sold for a very attractive price due to the whopping $60,275/day ten year TC associated with it. Given the losses experienced by YM during 2016, it is unlikely there are very many gems like that in its portfolio. In summary, the owned fleet is worth far less than the long-term debt and the negative working capital combined.
Based on its recently released 2016 financial statements, its April letter to customers, the likely value of its owned fleet, and the prolonged, slow recovery expected for the Containership sector, YM has to restructure. Without a significant debt to equity swap and new credit lines, YM will lurch into insolvency sometime during the second half of 2017.
A YM bankruptcy or restructuring represents a headline risk to NMM. If the TCs are terminated in a bankruptcy (the worst possible outcome), NMM’s maximum revenue and margin exposure with 14 and 16 months remaining on the two $34,266 per day YM TCs is approximately $21.5 million, assuming a $24,000 per day drop in rates. This exposure decreases $1.44 million for every additional month that YM meets its obligation under the TCs. For example, if YM was to go belly up at the end of September, the remaining revenue and margin exposure would be about $12.4 million, disappointing but not the end of the world.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.