Moody’s Investors Service has today downgraded the corporate family rating (CFR) of Navios Maritime Holdings, Inc. (Navios Holdings) to Caa1 from B2 and its probability of default rating (PDR) to Caa1-PD from B2-PD.
Concurrently, Moody’s downgraded the ratings on Navios Holdings’ $650 million senior secured first preferred ship mortgage notes to B3 from B1 and the rating on its $350 million senior unsecured notes to Caa3 from Caa1. The outlook on all Navios Holdings’ ratings is stable.
“Our downgrade reflects both the significant weakening of Navios Holdings’ financial profile in recent quarters as a result of the continued challenges in the dry bulk market and Moody’s view that market conditions are unlikely to improve in 2016 as previously expected by the rating agency. It also reflects Moody’s anticipation that the company’s free cash flow will remain negative in 2016 and its liquidity profile will consequently weaken, as market conditions continue to be difficult,” says Marie Fischer-Sabatie, a Moody’s Senior Vice President and lead analyst for the issuer.
Today’s downgrade reflects (1) Navios Holdings’ weakened financial profile, which has been affected by the challenging dry bulk market since end-2014 and corresponding weak shipping rates; and (2) Moody’s expectations that the company’s financial profile will not recover in 2016. The agency also expects that the company will generate negative free cash flow in 2016 and that its liquidity profile will consequently weaken.
During 2015, Navios Holdings’ credit metrics deteriorated and its leverage ratio (i.e., debt/EBITDA, including Moody’s adjustments) increased to 8.3x for the 12-month period through September 2015 from an already high level of 7.4x at end-2014. Moody’s does not expect that Navios Holdings’ financial profile will improve during 2016, as market conditions in dry bulk will remain difficult.
Despite the increasing pace with which the industry is retiring aging ships, Moody’s projects that growth in the supply of dry bulk capacity will still outpace demand growth in 2016, owing to a high level of planned vessel deliveries and a subdued demand growth, which will weigh on dry bulk rates and keep them at low levels. Dry bulk trade is highly dependent on China, which is the world’s largest iron ore importer and one of the largest coal importers. China’s economic slowdown has been weighing on the demand for dry bulk shipments.
Moody’s nevertheless acknowledges that, in spite of these weak market conditions, Navios Holdings has recently managed to secure eighteen-month to three-year charters for a number of its vessels at rates above current market levels. Navios Holdings also announced in November that it would suspend its approximately $25 million annual dividend payment and replace it with a $25 million share repurchase programme to be completed over two years, resulting in $25 million of cash preservation. However, this action does not fully offset the effects of the recent dividend cut by its affiliate Navios Maritime Partners L.P. (Ba3 negative).
Moody’s expects that Navios Holdings’ liquidity profile will weaken in the next 12 months, as its cash balance will decline further owing to negative free cash flow. Navios Holdings had a cash balance of around $175 million at Q3 2015 (versus approximately $250 million at end-2014) and Moody’s projects that cash flow from operations will be limited to around $10-20 million during 2016.
During 2016, Navios Holdings’ liquidity needs will essentially comprise capital expenditures of around $150 million, of which $90 million relates to its consolidated subsidiary Navios South American Logistics Inc. (B2 stable) and $60 million relates to new buildings, and some limited cash outflows related to preferred dividends and the company’s $25 million share repurchase programme. Overall, Moody’s expects that Navios Holdings will have negative free cash flow in 2016 of $140-150 million. Part of the capital expenditures will nevertheless be funded with drawings under two committed financing lines of $41 million and $36 million, respectively, limiting the decline in cash balance. The company’s alternative liquidity sources are dependent on the financial flexibility of its subsidiaries, as most of the dry bulk assets are encumbered already.
The recently weak trading of Navios Holdings’ bonds and shares may in the near term restrict the company’s access to debt and equity markets. However, the company does not have any immediate refinancing needs. Navios Holdings has limited debt repayments amounting to approximately $20 million in 2016. The next important maturity takes place in February 2019, when the company’s $350 million senior unsecured notes mature. Navios Holdings does not have any revolving credit facility at its disposal. Under its vessel-financing bank facilities, the company has several financial covenants: headroom under one of its financial covenants has been tight in past quarters.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody’s expectations that, in spite of challenging market conditions, the company’s financial profile will remain within the boundaries set for the Caa1 rating in the next 12-18 months.
WHAT COULD CHANGE THE RATING UP/DOWN
Although not expected in the near term, upward rating pressure could arise if market conditions in dry bulk improve, resulting in the company returning to positive free cash flow generation and reducing its leverage ratio comfortably below 8x through the cycle.
Downward rating pressure could arise if Navios Holdings’ (1) negative free cash flow is larger in 2016 than Moody’s expectations or remains negative beyond 2016; and/or (2) its (fund from operations + interest)/interest ratio moves towards 1x. Furthermore, downward pressure on the ratings could result in case of a weakening of Navios Holdings’ liquidity profile beyond what Moody’s expects.
The principal methodology used in these ratings was Global Shipping Industry published in February 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Navios Holdings, which is listed on the New York Stock Exchange, is a global shipping and logistics company. In addition to its own operations in the transport of dry bulk commodities, Navios Holdings owns a 63.8% stake in the logistics company Navios South American Logistics Inc. and various minority stakes, including (1) a 20.1% stake in the dry bulk and container shipping company Navios Partners, (2) a 46.5% economic interest in the tanker company Navios Maritime Acquisition Corporation (B2 stable) and (3) an indirect economic interest of 28.3% in Navios Maritime Midstream Partners LP (B2 stable). In LTM September 2015, Navios Holdings reported revenues of $518 million and EBITDA of $136 million.