brewer12345
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Mar 6, 2003
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- 18,085
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.
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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.