Follow Shipping Stocks?

[brewer12345]

But even so, there is a hazard in this business model, at least as I see it. NM goes to the equity markets to fund its growth. They of course also borrow, but if the number of ships is increasing and revenues growing, they would quickly get overleveraged without the equity infusions.

No doubt at times like today when the cost of equity capital is very high for NM they can get along by throttling back growth. To what extent I don't know, because I don't know the conditions of their ship orders.

And of course, sooner or later they will have to refinance existing ships, just like a REIT will have to refinance a certain portion of mortgages.

ha

A few comments:

- NM has indeed issued equity a few times in the past couple years to finance growth. They have also issued senior unsecured bonds. However, the equity is in place and the company is a much larger, more diversified animal than it was 3 years ago. I think they are or will be largely self-funding in the future.

- NM has a bunch of ships on order, but at least half of the ones they planned on owning outright already have long term charters on them that will essentially completely pay back the debt on the associated ships. They also have a bunch of ships on order that are to be leased. My guess is that they will be able to tread water on the leased ships even at curent reduced day rates. As for throttling back growth plans, they can arguably do a number of things. The ones that make the most sense to me are either delaying delivery of some of the ships or simply walking away from deposits on some orders for ships yet to be chartered. GNK just did the latter on 6 ships. I estimate that NM would not have to do so on many ships to make a huge difference on the liquidity front (which isn't terrible to begin with).

- Most of the company's debt is associated with specific ships. It is recourse to the company, but the time charters in place will service and pay back the debt without much fuss. The looming maturity that could inconvenience them (IMO) is that of the $300MM face senior bonds. But they are not due until 2014, by which time the world will be a different place.

I think that in the short term there are two major risks, both of which the company has hopefully mitigated. The first is potential defaults in the FFA market, in which NM trades regularly. They got stung in a minor way a year or so ago and indicated they were getting serious about counterparty risk inthe FFA market, so hopefully they did so. The second is defaults on teh part of charterers. Knowing how volatile the bulker market is, NM had their charters guaranteed by a highly rated third party. If this third party is the same one NMM uses, then NM's charters are guaranteed by an agency of the Belgian government.

Long term the risk is that the dry bulk market never recovers from its current sorry state. Hard to imagine that being the case unless you think China and India never resume growth or magically source lots of new resources (coal, iron ore, grain) that do not have to be transported by ship.

 

[Art G]

With a P/E under 1, there's something there we're not seeing.....or know about.

 

[brewer12345]

Yeah, yeah, I forgot to mention the thing about the space aliens.

 

[Art G]

Wait! I'm on your ignore, there's no way you saw that post.

 

[haha]

Brewer, thanks for your comments.

Here is a piece from the London Independent Business giving a little color on the current market situation:

Shipping: Holed beneath the waterline

The staggering and sudden decline in the cost of chartering a cargo ship reflects both the global economic slowdown and the ongoing credit crunch. Sarah Arnott reports
Thursday, 6 November 2008


Hold on to your hat: the Baltic Dry Index was down at 826 points yesterday, a shattering drop from its high of 11,793 in May.

Shipping: Holed beneath the waterline - Business Analysis & Features, Business - The Independent

Ha

 

[brewer12345]

Interesting, but mostly already out there. Where do you find this stuff ha?

 

[haha]

Interesting, but mostly already out there. Where do you find this stuff ha?

This was just happenstance. I was looking for an explanation of a special dividend by Imperial Tobacco earlier this year and just came across this piece on the current shipping situation when I followed the link to the Imperial article.

For me, information sticks better when it is in narrative form. I don't think I have ever known of a similarly huge drop in prices in any commodity market as the spot charter rates referenced in this article. No wonder the bulker stock prices are down.

Ha

 

[al_bundy]

might not reach $1.89 and looks like this is probably the bottom for NM

 

[brewer12345]

A bit of covenant analysis I wrote up on NM. One of the fears running through the market about the bulkers seems to be that they will bust a standard covenant in shipping bank agreements that requires the value of the fleet to be north of 125% of the outstanding bank loan amount.

We all know that this is what the market is a-quiver about right now, so why not take a close look at the facts and circumstances?
First let me state a few assumptions:

- NM will not have trouble avoiding problems with fixed charge covenants, cash flow, net worth covenants, etc. This is pretty much about collateral value vs. bank debt.
- Charterers will not fall down on NM's deals with them. If they do, NM is insured, so I think this holds water even if you are less sanguine about this assumption.
- The dry bulk market will not stay at a sub 1000 BDI forever. At these levels, we will see massive scrapping and order cancellations and there is no way we will see any further tanker conversions.

Now that that is out of the way, lets look at the debt NM actually has and will have. At 6/30, they had $705MM of debt and will draw down roughly another $235MM on already establshed bank lines to complete the construction of 4 capes that are financed and chartered. So we are looking at $940MM of total debt. For the purpose of this analysis, we will assume that the remaining cape newbuilds on order get cancelled as NM presumably will not be able to finance the orders.

About $100MM of the debt belongs to NSALI and is carried by taht unit, with no market value implications to the bulker fleet. Another $300MM is the senior unsecured debt that does not require collateral of a particular market value. So the remaining debt ($940 - $400 = $540) of $540MM is what requires sufficient collateral to avoid covenant problems.

All the bank lines have essentially the same language: the market value of the ships must be at least 125% of the outstanding debt on the ships. So the point at which the covenant is breached is when the value of the fleet drops below 540 * 1.25 = $675MM.
So what is the fleet? I see an owned fleet of 12 supras (including the recently purchased Ulysses and the TBN supra due early '09), 5 panas (including the Asteriks), and 4 capes (all under construction with charters and financing already in place). Your guess as to value is as good as the next. By way of a (very) rough guess, let's put a value of $40MM on each supra and pana, and $50MM on each cape. That values the fleet as follows:

Supras: 12 X 40 = $480MM
Panas: 5 X 40 = $200MM
Capes: 4 X 50 = $200MM
Total: $880MM

That looks pretty comfortably ahead of our minimum covenant requirement.

If the above fleet valuation proves generous, what might the alternatives available to NM be?

- First and foremost, NM can cure a potential default by paying down some of the debt. The company had $284MM in unencumbered cash available at 6/30, some of which was used to purchase the Ulysses. I estimate that over the next 18 months NM will generate EBITDA between $50 and $60MM a quarter inclusive of NMM dividends (assuming charters renew at 10k for supras, 15k for panas and 20k for capes), vs. interest expense of $10 to $15MM per quarter. If they don't chop dividends it would requirethe continued outlay of another $9MM or so per quarter, leaving the company with roughly $30MM per quarter with which to de-lever.
- NM could sell assets and use the proceeds to pay down some of the bank debt. I think their share of NSALI is potentially worth $150 to $200MM. They could conceivably sell ships as well.
- Finally, NM could get a covenant waiver from the banks. The banks who financed NM are the same ones who financed lots of dry bulker owners who are in far worse shape than NM, so I suspect that NM will not be at the top of the list as to who they go after first. After all, if you have guys like DWT to deal with, you will not be too quick to pester a borrower who is making principal and interest payments, has locked in charter revenue for years to come, etc.

 

[Dawg52]

Thanks for the info Brewer.

 

[haha]

Brewer, this analysis makes complete sense. But I am getting gun-shy from repeatedly buying something and immediately losing $10,000.

We know this lady is pretty. But are we sure she doesn't have herpes?

Ha

 

[brewer12345]

We know this lady is pretty. But are we sure she doesn't have herpes?

Ha

In this particular case, it appears we will find out in a week or so when earnings come out.

 

[Dawg52]

NM down another 5.5% today. Boy, what a pounding I have taken.

 

[unclemick]

Ok - you guys do NM while I hold back trying to jump in and buy some more EGLE.

heh heh heh - I almost feel like a hot day trader with all this potential action. .

 

[al_bundy]

EGLE might be seeing $3 in a few weeks

 

[Gardnr]

EGLE might be seeing $3 in a few weeks

Do you have a basis for saying that? Give it up if you're not just being pessimistically sarcastic!

Anybody know why the relative strength difference between NM and EGLE today? EGLE up with market, but very strong at +19%. And NM falling further, down 5%+

 

[Dawg52]

Anybody know why the relative strength difference between NM and EGLE today? EGLE up with market, but very strong at +19%. And NM falling further, down 5%+

Because I own NM. Enough said.

 

[al_bundy]

EGLE is closer to $10

reason i think EGLE is going to $3 or $3.50 is by looking at the chart

 

[al_bundy]

one of my trading blogs mentioned NAT today

dividend date is the 18th or 22nd. you can buy and hold until then, sell and collect the dividend. yield is almost 20%

 

[dm]

NM is still sinking. So is EGLE. Of coarse I own both. NM is now below $2.00. Crap!!

 

[haha]

NM is still sinking. So is EGLE. Of coarse I own both. NM is now below $2.00. Crap!!

Yep. I thought I bought when lots of bad news was in the NM price.

Nevertheless, I'm down 50%.

Investors must be afraid that they have been lied to, or that unknown possibilities will jump out and kill the company. This is a BK price, in a company that has no obvious BK tells.

I was afraid of this competitive commodity industry when it was flying, but later after reversals I thought "Can't get killed falling out of a basement window." Wrong!

Ha

 

[Dawg52]

Nevertheless, I'm down 50%.



Ha

Consider yourself lucky.

 

[Dawg52]

Well the market was up 6.5% today and NM was up a whopping 2 pennies. Let the good times roll.

 

[73ss454]

Hey Dawg, I'm holding 4000 at about 15. Make you feel any better that you're not alone?

 

[Dawg52]

Hey Dawg, I'm holding 4000 at about 15. Make you feel any better that you're not alone?

Wow, you got me beat. I have 3,200 shares at 10. I'll take a med for you.