What Led Navios Partners to Cut Distributions?
What led to new distribution policy?
As we’ve discussed in the previous article, Navios Maritime Partners (NMM) cut its distribution by 52% to $0.85 per unit annually. Many factors led to the management’s decision:
- continuing uncertainty related to global trade, seaborne commodity prices, and seaborne volumes
- prolonged weak dry bulk outlook
- continued digestion of oversupply of dry bulk vessels
- inability to grow as access to capital markets was difficult due to the distribution yield
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Distribution coverage jumps to 1.7x
Many analysts believed that the previous distribution was unsustainable given it was under-covered and the dry bulk charters were getting reset at a lower rate due to a weak spot market and weak outlook. We had also estimated a cut of ~35% to the distributions based on the downside to operating surplus. The weak dry bulk market is also negatively impacting NMM’s peers such as Scorpio Bulkers (SALT), Ship Finance International (SFL), and DryShips (DRYS).
The Guggenheim Shipping ETF (SEA) invests in major shipping companies around the world. NMM forms 2.9% of SEA’s holdings. On the other hand, the SPDR S&P Metals and Mining ETF (XME) provides global exposure to the metals and mining space. NMM is also part of the Yorkville High Income MLP ETF (YMLP) and forms ~6% of its holdings.
With the 52% distribution, NMM’s distribution coverage has jumped to 1.69x from below 0.8x in 2Q15. This seems much more sustainable in the market, given the weak outlook for freight rates due to oversupply and tepid demand.
Management also stated in the earnings call that the current distribution is sustainable for at least five years under the current market environment.
The new distribution rate will enable the company to generate value over the long term while sustaining an attractive distribution yield. The new distribution implies a distribution yield of 14.7% at the closing price on November 3. NMM’s distribution was under-covered going forward at the previous distribution at about only 0.65x.
During the call, management indicated that it views sustainable coverage to be around 1.2x as compared to the current 1.7x.
As a result of this distribution reset, NMM’s sponsor will forgo approximately $14.1 million in annual distributions and the general partner will forgo about $3.9 million. Navios Partners also stated that there won’t be an IDR (or incentive distribution right) reset.