Monday, August 10, 2020

Never Navios, Part II

Last November, I outlined all the reasons one should never invest in Navios, before proceeding to invest in Navios and lose money. Welcome to Chapter II.

The main problem is Angeliki Frangou. Unfortunately, she's the CEO. "Arms-length transaction" is not a term that appears in her dictionary, and she just so happens to own the company that collects inflated external management fees from Navios. One time she created so much shareholder value that the fire department showed up. The other problem is debt, which Navios owes to the tune of over a couple hundred million in outstanding credit facilities. In-chartered tonnage adds even more leverage - all on a market cap of only $80 million. Oh, and there's a $650 million bond issue maturing in 2021.

Why would anyone buy stock in a company like this? Who knows. I bought the bonds. I've been buying over the past month or two for 57 cents on the dollar. I get that dollar back when the bonds mature next year, and I earn 8.125% interest on the face value of the bond in the meantime. Covenants are fine - even pension fund patsies are reluctant to lend 8 year money to a financial forest fire without a few guardrails.

Why are the bonds so cheap? Well, Navios is leveraged at 10x adjusted EBITDARC*, the bonds are under review for downgrade by Moody's, and the sector has somehow managed to underperform the airline ETF in 2020 (though it's hard to tell since the shipping ETF folded). Regardless of the reason, these bonds Coronacrashed along with the rest of the market and stayed there.

Frankly, I know more about 18th century German choral composition than credit analysis, but I do know that plugging in vessel values from the active secondhand market leaves positive value for the equity. It's even pretty cheap if you squint hard enough. If you want to get fancy, you can buy 24 shares of stock for every bond, creating the whole company at a fire sale price. On any given day, this adds $100-130 to the cost of your bond - depending on how pessimistic the market is on tankers. I'm content to buy the bonds at 570 and wait 15 months to double my money.

Despite the negative press covfefe, it's not all bad in tankerland - current rates mostly cover operating costs during the seasonally weakest month of the year. Demurrage terms and time charter rates are pricing in a recovery starting in October (which coincides with the beginning of the strong season). In the meantime, I expect demolitions of older vessels which are no longer economical to maintain.

What if I'm horribly wrong? Middle aged tanker values can fall 25-30% and I still break even. Tankers are already valued in the neighborhood of depreciated replacement cost, so if vessel values fall 30%, what does that imply? Unless they repeal the laws of supply and demand, I find it hard to imagine a world where these bonds are worth less than I'm paying, and you could do worse than buy a pirate fleet for 70 cents on the dollar.

What is a note worth? If you are one of the three people who believe the normal distribution is a good fit for the shipping industry, you can plug the capital structure into the formula for Brownian motion and it will spit out some number in the 800's. You could make a case that Covid-19 renders the historical volatility of tanker assets over the past century irrelevant, and if you shoot me an email, I'll be happy to buy your bonds and spare you the extra "risk".

Where in the world is Navios going to get the money to pay off these bonds? Angeliki will think of something. She may not be the reincarnation of Henry Singleton, but she has extensive experience heading failing companies. Right now she's in the open market buying back bonds at 60 cents on the dollar out of cash flow (much of which is contracted). I wouldn't put it past her to pull off some crazy last ditch refinancing, but if push comes to shove, she can always do "whatever it takes" to preserve the family piggy bank and print equity like there's no tomorrow.

Disclosure: I own a material position in the Navios Maritime Acquisition Corporation 2021 First Priority Ship Mortgage Notes.

* Earnings Before Interest, Taxes, Depreciation, Amortization, Riots & Covid-19, adjusted for stock-based compensation and nonrecurring special charges that repeat every year. The company's debt to 2019 adjusted EBITDARC ratio of 10x represents an improvement of eight turns over the prior year.