TEXT-S&P revises Navios Maritime Holdings Inc outlook
-- Trading conditions in the dry bulk shipping industry remain difficult, in our view, prompting us to revise our charter rate assumptions for 2012-2013 downward.
-- We expect that Navios Maritime Holdings Inc. will report lower-than-forecast operating profits in 2012, resulting in credit measures that will continue to fall short of our guidelines for the rating.
-- We are revising our outlook on Navios Maritime Holdings Inc. to negative from stable and affirming our 'BB-' rating on the group.
-- The negative outlook reflects our view that Navios Maritime Holdings Inc. might not be able to turn its credit measures around by 2013. Rating Action As we previously announced on Oct. 30, 2012, Standard & Poor's Ratings Services revised its outlook on Marshall Islands-registered dry-bulk shipping company Navios Maritime Holdings Inc. (Navios Holdings or the group) to negative from stable. At the same time, we affirmed our 'BB-' long-term corporate credit rating on the company. Rationale The outlook revision reflects Navios Holdings' lower-than-expected operating profits in 2012, resulting in credit measures that will continue to fall short of our guidelines for the rating. Given the persistently depressed charter rate environment and weak prospects for the dry bulk shipping industry, which prompted us to revise downward our charter rate assumptions for 2012-2013, we see a risk that Navios Holdings may not be able to turn its credit measures around by 2013. Under our revised base-case scenario, we anticipate that Navios Holdings' funds from operations (FFO; operating cash flows before working capital changes and after cash interest costs) will be about $140 million for 2012, after about $165 million in 2011. This is below our previous expectations of $170 million-$180 million. In a combination with only moderately reduced debt following the final instalment payment for a newbuild, this will result in weakened credit measures in 2012. The rating was previously predicated on our expectation that Navios Holdings' credit measures would gradually improve from 2012. Our base-case scenario now assumes that the group's ratio of adjusted FFO to debt for 2012 will be about 13.5%, compared with 14.3% in 2011, and hence below the 16%-20% we consider appropriate for the 'BB-' rating. Under our base case, we now forecast that Navios Holdings will likely achieve a turnaround in its credit measures in 2013, and subsequently further improve them to a rating-commensurate level by 2014. This is based on our assumption of moderate charter rate recovery and the resulting stabilization in Navios Holdings' EBITDA (including recurring cash dividends from affiliated companies) at about $250 million in 2013, whereby a moderate drop in earnings from the dry bulk operations will be compensated by a growing earnings contribution from the logistics business and nonconsolidated affiliates. Our base case also assumes that the company will make no additional capital investments and, hence, use its free operating cash flows (FOCF) for debt reduction. Navios Holdings' high level of contracted revenues provides good earnings visibility and, thus, downside protection. As of Aug. 22, 2012, 93% of Navios Holdings' core fleet's ship operating days were fixed for the remainder of 2012, 41% for 2013, and 24% for 2014. We understand that average charter rates in these contracts are above Navios Holdings' cash flow break-even rates (including capital repayments). In addition, Navios Holdings has bought credit protection backed by an investment-grade-rated EU member state for nonperformance under these charter arrangements. This credit protection has proven to be effective and thus it provides additional security to earnings. However, despite the protection it offers, we don't think near-to-medium-term contract coverage fully insulates Navios Holdings from weak industry prospects, notably because the group needs to renew a portion of its contract portfolio regularly at charter rates that could potentially be lower than in previous contracts. In our view, this will continue hampering Navios Holdings' earnings capacity over the near to medium term, absent a significant rebound in charter rates from 2013, which we currently do not foresee. We view a recovery in charter rates as uncertain, given the structural overcapacity in the industry and the slowing pace of expansion in the global economy and, consequently, in trade flows. Furthermore, in our view, opportunistic add-on acquisitions will remain an integral part of Navios Holdings' operating strategy and we view investments in additional tonnage, in particular to take advantage of relatively low vessel prices, as likely in the near to medium term. If this happens, it will likely put additional strain on the group's cash flow measures. The rating on Navios Holdings continues to be constrained by our view of the group's high operating risk in the cyclical and volatile dry-bulk shipping industry and by its record of aggressive growth. In addition, we believe Navios Holdings' financial risk profile is likely to prove "aggressive" over the industry cycle. We consider these risks to be partly balanced by Navios Holdings' business risk profile, which we view as "fair" and which is underpinned by the group's conservative charter policy, as reflected in a decent level of time-charter coverage. Furthermore, Navios Holdings has a solid reputation as a quality operator and a modern, attractive vessel fleet. As of Aug. 22, 2012, New York Stock Exchange-listed Navios Holdings owned 30 dry-bulk vessels and had chartered in 20 vessels on favorable long-term agreements, with a total of about 5.1 million deadweight metric tons. In addition, it is awaiting the delivery of four chartered-in vessels at various dates by 2013. The average age of Navios Holdings' active fleet is about five years, which compares very favorably with the industry average of about 11 years. Liquidity We assess Navios Holdings' liquidity as "adequate" under our criteria (see "Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers", published Sept. 28, 2011, on RatingsDirect on the Global Credit Portal). We consider Navios Holdings' liquidity profile to be underpinned by its policy of maintaining ample liquidity sources on hand, its strategy of prefinancing vessels on order, and its capacity to generate excess cash. Our base-case liquidity assessment rests on the following factors and assumptions:
-- We expect the group's sources of liquidity (including operating cash flows, surplus cash balances, and available and committed bank financing) will exceed uses (capital spending and mandatory debt amortization) by at least 1.5x over the next two years.
-- Liquidity sources will continue to exceed uses, even if EBITDA were to decline by 15%.
-- We understand that Navios Holdings was in compliance with its financial covenants as of June 30, 2012, and we expect the group to be able to manage the covenant tests in the near term. Navios Holdings' debt facilities include maintenance financial covenants, such as a minimum ratio of vessel values (adjusted for charters attached) to debt and a ratio of maximum consolidated liabilities to assets (adjusted for charters attached), certain of which are tested quarterly or semiannually. We note that management can proactively prevent a potential covenant breach by repaying debt from available cash resources and, in doing so, remain compliant. We believe that Navios Holdings has sufficient cash leeway to prevent a potential breach while retaining sufficient liquidity sources to be in line with an adequate liquidity profile.
-- The group appears to have sound relationships with its lenders and a satisfactory standing in credit markets.
-- We consider Navios Holdings' liquidity management to be generally prudent. As of June 30, 2012, Navios Holdings had $169 million in unrestricted cash and cash equivalents, of which $37 million was a minimum liquidity requirement as stipulated in the bank documentation and $44 million was at Navios Holdings' majority-owned subsidiary, Navios South American Logistics Inc. (B+/Stable)/--; Navios Logistics). Navios Holdings' access to off-balance-sheet liquidity consisted of $70 million in revolving credit facilities, of which $40 million was at Navios Logistics. As of June 30, 2012, the facilities, which are due for extension in 2013-2014, were fully undrawn. According to Navios Holdings, there were no outstanding commitments for new vessels, which should boost the group's capacity to generate positive FOCF from 2013 onward. As of June 30, 2012, pro forma for the effect of the $88 million add-on bond issued in July 2012 and prepayment of bank debt, Navios Holdings' mandatory debt repayment commitments were about $42 million in the 12 months started June 30, 2012, and $29 million in the 12 months starting June 30, 2013. Outlook The negative outlook reflects our view that, given the anticipated ongoing weak trading conditions, Navios Holdings might not be able to improve its credit measures to a rating-commensurate level in the near term. In our view, a downgrade would primarily stem from a prolonged downturn in the dry bulk shipping industry, absent prospects for a recovery in charter rates from 2013. Our base-case operating scenario estimates that the company's cash flow measures will weaken in 2012, and subsequently achieve a moderate turnaround in 2013, before improving to the rating-commensurate level by midyear 2014. We consider a ratio of adjusted FFO to debt of 16%-20% to be commensurate with a 'BB-' rating. We also assume that Navios Holdings will fund its potential investments so that it does not jeopardize the expected path of recovery in its credit measures. Nevertheless, we might consider lowering the rating if we saw clear signs that credit ratios were performing worse than we expected in our base case. We could revise the outlook to stable if we observed a sustained market recovery and if we considered the company's credit measures to be sustainably commensurate with the 'BB-' 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. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 Ratings List CreditWatch/Outlook Action; Ratings Affirmed
To From Navios Maritime Holdings Inc. Corporate Credit Rating BB-/Negative/-- BB-/Stable/-- Ratings Affirmed Senior Secured BB- Senior Unsecured B+
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