As of Aug. 22, 2012, Navios Acquisition, which is listed on the New York Stock Exchange, owned and operated seven very large crude carriers (VLCCs), four long-range product tankers (LR1s), three medium-range product tankers (MR2s), and two chemical tankers, with a total carrying capacity of about 2.6 million deadweight tons. Furthermore, it has an extensive order book, including nine MR2s and four LR1s, to be delivered by the fourth quarter of 2014.
We consider the tanker shipping segment to be characterized by high business risk, which constrains the ratings on Navios Acquisition. This is due to high capital intensity and significant asset value and charter rate volatility. We note that Navios Acquisition is able to partly offset the inherent risk by entering into time charter contracts for all its vessels.
S&P base-case operating scenario
Weak rates in the tanker sector have persisted since the second half of 2010. This is on account of muted demand for crude oil and oil products from key importers, the U.S. and, in particular, Western Europe, which is unable to absorb new vessel deliveries. In the product tanker market--the most relevant sector for Navios Acquisition in the near to medium term--average year-to-date time charter rates are currently significantly below their historical 10-year averages. Nevertheless, we see some promising near- to medium-term signals, such as potential growth in ton-miles due to changes in trading patterns and contraction of new vessel delivery. In our base-case operating scenario, we assume a sustained but moderate recovery of charter rates from 2013, which will be accompanied by an increasing number of vessel-available days as new tankers enter Navios Acquisition's fleet. We estimate a resulting improvement in Navios Acquisition's EBITDA to about $145 million in 2014, from about $130 million in 2013 and about $100 million in 2012. We take into account Navios Acquisition's high level of contracted vessel operating days, which provides good revenue visibility and consequently downside protection. As of Aug. 21, 2012, 100% of Navios Acquisition's vessel-operating days were fixed for the remainder of 2012, 83% for 2013, and 54% for 2014. We understand that the average charter rates in these contracts are above Navios Acquisition's cash flow break-even rates (including capital repayments).
S&P base-case cash flow and capital-structure scenario
According to our base-case scenario, Navios Acquisition's credit measures will gradually improve over 2012-2014. However, we believe that there is a risk that 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. This could, in our view, result for example from lower-than-expected charter rates.
We note that 2012-2014 will remain an expansion period for the company. Accordingly, its 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 8% 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 indicates 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 will have been operating, and therefore generating cash flows, for 12 months.
We forecast that Navios Acquisition's debt will slowly decline from 2013, after peaking in 2012, assuming that the company makes no additional investments in new vessels beyond the current new-build program of about $173 million, under which vessels are to be delivered in 2012-2014. Accordingly, we assume it will use discretionary cash flow for debt repayment. We nevertheless believe that the pace of deleveraging and subsequent improvement in cash flow measures that Navios Acquisition can achieve will be closely linked to future charter rate performance. We view this as uncertain given structural overcapacity in the industry, slowing growth in the global economy and, potentially, a decline in oil demand.
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 as of June 30, 2012 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) to 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 has sound relationships with its lenders and good standing in the capital markets; and
-- We understand that Navios Acquisition was in compliance with its loan-to-value financial covenants as of June 30, 2012. We note that the company can avert a covenant breach by repaying debt to increase headroom.
As of June 30, 2012, Navios Acquisition had about $73 million in cash, of which $40 million was a minimum liquidity requirement stipulated in its bank documentation. It also had about $53 million of availability under $120 million in credit lines with Navios Maritime Holdings Inc. (the largest shareholder) and Cyprus Popular Bank, due for annual extensions until 2014. In addition, as of June 30, 2012, Navios Acquisition had about $100 million of secured committed vessel financing. Furthermore, the company will likely generate about $50 million of operating cash flow in 2012 and $70 million in 2013, according to our base-case scenario.
We believe that Navios Acquisition's liquidity sources compare well with its liquidity needs. We note that the company's vessel new-build program, amounting to about $173 million as of June 30, 2012, with vessels to be delivered in 2012-2014 is about 60% funded with prearranged committed bank lines. Furthermore, Navios Acquisition has a manageable debt maturity profile, with a total of $30 million in mandatory amortization payments in the upcoming 24 months and no major debt repayments (including repayment of credit lines) before 2017, when a $505 million notes mature. We also assume that the company will use about $10 million for annual dividend payments.
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 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 set 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; and limitations on asset sales, mergers, consolidations, and transactions with affiliates.
The negative outlook reflects our view that, given 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 lengthy weakness in the product tanker shipping industry, absent prospects for a sustained recovery in charter rates from 2013. Continuously depressed charter rates would likely prevent Navios Acquisition from achieving favorable employment for vessels not yet delivered and contracted, and those up for recharter. They would also reduce the company's ability to make profit-share income from employed vessels, resulting in persistently weak credit measures and possibly liquidity pressure.
The rating could come under pressure if Navios Acquisition's debt were to increase on account of additional investments in new vessels beyond the current new-build program. In our base-case operating scenario, we estimate 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 were to see clear signs that Navios Acquisition's performance was below our expectations.
We could revise the outlook to stable if we were to observe 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.
Related Criteria And Research
-- 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