Will the Distribution Cut Position NMM Well for Future Growth?
Distribution cut to result in surplus cash
The distribution reduction will lead to surplus cash for Navios Partners (NMM) to the tune of $50 million annually. While the management has maintained that this surplus could be used to acquire container ships, it seems that the company will be conservative in the short term in deploying this cash in the face of the current weak dry bulk market. Container ships correlate to EU and US (SPY) import growth.
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Acquisitions in the container sector
In its 2Q15 results, NMM discussed its option to buy a container ship vessel that was priced at $147.8 million. The contract included a 12-year charter at $60,275 per day. This would have resulted in additional EBITDA of ~$18.4 million annually. However, the company let go of this opportunity, as management believed the current credit environment was not right for the acquisition.
Now, with surplus cash available to the company, it could pursue such accretive deals and strengthen its cash flows going forward. The management mentioned during the call that this is particularly true at this time as access to equity capital markets is limited due to the distribution yield. The importance of container vessels is growing in NMM’s portfolio, as the chart above shows.
While Navios Partners is not planning to acquire any new vessels at the moment, Diana Shipping (DSX) is acquiring vessels. On the other hand, DryShips (DRYS) sold off its entire fleet. Ship Finance International (SFL), which is a spin-off from Frontline (FRO), is also acquiring vessels in the container segment.
Redeployment should create opportunities
The market has been worried for some time now whether Navios Partners could sustain its high distribution yield while the dry bulk industry outlook remains bleak. Now that this concern is out of the way, the market might be more appreciative of the opportunities Navios Partners offers. It has lower leverage and lower operating expenses compared to the industry average, and its charter coverage provides certainty to cash flows in an uncertain and weak market.
While the dividend reset is painful for investors in the short term, in the long term, it creates accretive opportunities for NMM to redeploy this cash to generate even more cash flows. NMM’s management has a strong execution record, which should also give confidence to investors that the company will use its surplus cash well.