Crude Oil Tanker Operator Navios Midstream #B# Rating Outlook Stable

Stocks and Financial Services Press Releases Friday May 25, 2018 17:23
FRANKFURT--25 May--S&P Global Ratings

FRANKFURT (S&P Global Ratings) May 25, 2018--S&P Global Ratings said today that it had affirmed its 'B' long-term issuer credit rating on Marshall Islands-registered owner and operator of crude oil tankers Navios Maritime Midstream Partners L.P. (Navios Midstream). The outlook is stable.

At the same time, we affirmed our 'B' issue rating on Navios Midstream's senior secured debt. The recovery rating remains at '3', reflecting our expectation of meaningful (50%-70%; rounded estimate 65%) recovery for noteholders in the event of a default.

The affirmation reflects that Navios Midstream's 2017 and first-quarter 2018 financial performance was largely in line with our expectations, underpinned by the company's time-charter profile with an average remaining contract term of about 3.0 years (including the rate backstops from Navios Maritime Acquisition Corp. [Navios Acquisition]). Although Navios Midstream's financial position has weakened, as reflected in the contraction in S&P Global Ratings-defined EBITDA generation to $54 million in 2017 compared with $63 million in 2016, we believe the company will continue to post financial results over 2018-2019 in line with our requirements for the 'B' rating.

The EBITDA contraction mainly stemmed from lower profit sharing, unscheduled vessel off-hire days, and the most recent tanker-employment deals. These included the placement of two vessels into very large crude carrier (VLCC) pools that typically operate on volatile (and currently low) spot rates, and the re-charter of one vessel at less attractive terms than previously. Owing to the subdued charter-rate conditions, we think Navios Midstream will employ its vessels due for renewal in 2019 at rates that are below the currently contracted and guaranteed rates. Consequently, we see EBITDA declining to $47 million-$48 million in 2019 from the $56 million-$57 million we currently forecast in 2018.

Furthermore, despite the company's ability to generate free operating cash flow (FOCF), buttressed by relatively low cash interest and maintenance capital expenditures, we think Navios Midstream has only limited scope for deleveraging because it will continue both its dividend distributions (most recently significantly reduced) and its periodic and partly debt-funded fleet rejuvenation or expansion (of which the timing and magnitude is currently uncertain). We factor into the rating our expectations that potential further additions to the fleet will be to some extent equity funded to limit financial leverage dilution.

Accordingly, Navios Midstream's credit measures will soften in our view, so that S&P Global Ratings-adjusted weighted average funds from operations (FFO) to debt will be about 20% in 2018-2019, compared with about 21% in 2017. This incorporates potential weakness in 2019, when adjusted FFO to debt might temporarily fall to about 18%. We expect the ratio to rebound above 20% in 2020, thanks to more balanced supply and demand conditions and the resulting higher rates, as owners continue to scrap their older vessels and new vessel delivery slows. Our assessment of the financial risk profile incorporates Navios Midstream's relatively high adjusted debt of about $201 million as of Dec. 31, 2017, which reflects the underlying industry's high capital intensity, as well as the company's expansionary investments and dividend distributions.

Navios Midstream's financial position is linked to that of its 59% owner and general partner Navios Acquisition and the wider Navios group, including Navios Maritime Holdings Inc. (Navios Holdings), both of which display lower credit quality. Navios Acquisition owns and operates a fleet of 35 crude oil carriers and oil product tankers. Navios Holdings controls a fleet of 71 dry-bulk vessels (38 owned and 33 chartered-in vessels) and provides transportation and logistics services in South America.

We assess the creditworthiness of Navios Midstream and Navios Acquisition on an integrated basis because of the entities' material business relationships. For example, Navios Acquisition has provided a de facto rate guarantee/rate backstop for Navios Midstream's three VLCCs, which represent half of Navios Midstream's fleet. Navios Holdings also falls under the group credit profile (GCP) because we believe Navios Acquisition's financial and liquidity position is linked to that of its 47.7%-owner Navios Holdings. There are also overlaps in management and the board of directors across the Navios group of companies, as well as common business ties and shared name affiliation, corporate history, and support functions.

We maintain our view of Navios Midstream's stand-alone credit profile (SACP) at 'b+'. The key consideration in our assessment of Navios Midstream's weak business risk profile is the company's relatively narrow scope and diversity, with a predominant focus on crude oil shipping, a business model relying on six VLCCs to generate comparatively small absolute EBITDA, and a concentrated customer base.

VLCC rates will remain under pressure, since it seems that the sector needs some time to rebalance. This is reflected in the low rates--notwithstanding crude oil tanker demand likely exceeding crude fleet growth in 2018. We note that OPEC recently extended its production restrictions until the end of 2018 (with a review scheduled in June 2018) and it is more than complying with its announced cuts in an effort to support oil prices. This has had a knock-on effect on cargoes available for crude tankers and is the main reason that crude oil stocks have declined from their high in March 2017 to just above the five-year average in March 2018.

The order book for large crude tankers remains firm and accounts for 15% of the global tanker fleet after an unexpected spike in orders in 2017. These orders were driven by attractive vessel prices, but did not take into account the weak rate conditions. However, as the oil stock overhang is worked off, along with accelerated VLCC scrapping as seen year to date, we assume that VLCC shipments and rates will start increasing toward the end of 2018. We also note that order book nondeliveries have averaged 30% since 2010. Taking this into account, we forecast lower rates for VLCC at $23,500 per day (/day) in 2018 (from around $27,000/day in 2017). We foresee a rebound in rates to $27,500/day in 2019, as robust scrapping will continue moderating fleet growth.

The main support to Navios Midstream's competitive position comes from its time-charter profile. Navios Midstream has currently contracted out 100% of its available days for 2018 and 41% for 2019, including the backstop commitment provided by Navios Acquisition. Furthermore, the company's profitability benefits from its fixed and predictable cost base, which underpins comparatively low volatility of EBITDA margins and the return on capital.

We also believe that, in general, oil-shipping has more favorable characteristics than dry-bulk and container shipping because the credit quality of oil-shipping customers is typically stronger; hence, the counterparty risk is lower. That said, the dry-bulk and containership time charters tend to be fragile, and we continue to observe more defaults on dry-bulk and container charter contracts than on oil-shipping contracts.

We adjust our 'bb-' anchor for Navios Midstream downward by one notch because, based on our comparable ratings analysis, given that the company is susceptible to low-probability, high-impact events because of its small absolute size and limited scope of operations.

The stable outlook reflects our expectation that Navios Midstream will maintain business and financial strength commensurate with the current rating over the next 12 months, despite weak tanker-rate conditions. In addition, we anticipate that the GCP, which reflects the weighted average creditworthiness of Navios Midstream, Navios Acquisition, and Navios Holdings together, will not affect Navios Midstream's SACP.

Assuming no change to Navios Midstream's business risk profile, we consider a ratio of adjusted FFO to debt higher than 12% to be commensurate with the current rating. This compares with an average of around 20% we forecast for 2018-2019 and points to ample headroom for financial underperformance against our base case.

We believe the potential for an upgrade is limited in the next 12 months, given our expectation that tanker-rate conditions will remain subdued. We may, however, upgrade Navios Midstream if the GCP strengthens to 'b+' from 'b' currently, which could happen, for example, if Navios Holdings' and Navios Acquisition's financial performance improved significantly and simultaneously. For Navios Holdings, this would imply securely positive FOCF, stable liquidity sources that amply cover uses, and adjusted FFO to debt sustainably above 12%. For Navios Acquisition, this would mean a rebound of adjusted FFO to debt to more than 6% stemming from a recovery in tanker rates.

We may downgrade Navios Midstream if its SACP weakened to 'b-' or lower, such as following a significant and unexpected deterioration of credit metrics, with adjusted FFO to debt falling below 12%, or erosion of the business risk profile to vulnerable accompanied by weaker ratios. This could happen if counterparties failed to deliver on their contracts and Navios Midstream amended charter agreements or re-employed vessels at open-market rates that are materially below the previous rates, resulting in significantly diminished EBITDA and profitability.

Further strain could come from a possible deterioration of Navios Acquisition's or Navios Holdings' credit measures or liquidity, leading us to revise down our assessment of the GCP.

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