How Does Navios’s Charter Premium Impact Its Net Asset Value?
A vessel with a long-term contract that pays more than current market or time charter rates is more valuable than a vessel operating at spot prices. We add the market value of long-term charter agreements to net asset value. This gives us the time charter premium over the charter rate for today’s value. The premium applies to the charter’s remaining duration.
Interested in NMM? Don't miss the next report.
Receive e-mail alerts for new research on NMM
Investors should note that long-term contracts entered into by companies when rates are higher usually lead to a charter premium. Under the present deteriorating rates environment, not many charterers would like to go for long-term charters. Most dry bulk companies, including Safe Bulkers (SB) and Scorpio Bulkers (SALT), operate primarily on spot bases. Market charters for Diana Shipping (DSX) are rolling over, rendering the company vulnerable to low spot and time charter rates.
Investors interested in broad exposure to industrials can invest in the SPDR Dow Jones Industrial Average ETF (DIA).
Calculating charter premium
For Navios Maritime Partners’ (NMM) dry bulk fleet, we considered the time charter rates from six months to three years for different charter maturities to calculate the market premium. According to shipbroker Intermodal, the one-year, two-year, and three-year time charter rates for Capesize for the week ended January 19, 2016, were $5,250, $5,750 and $7,000 per day, respectively. We also obtained the time charter rates for other vessels. For maturities over three years, we’ve used rates higher than the current three-year charter rates, as the current rates might not be sustainable in the long term. Many ship owners are not even breaking even at the current rates. Over the long term, rates might revert closer to historical norms. For Capesize, we’ll use $10,000 per day for contracts extending beyond three years.
Navios’s container segment has long-term contracts ranging from three to 11 years. To calculate the charter premium for this segment, we’ve used historical long-term averages. According to Hamburg Shipbrokers, the long-term average for a two-year 2,500 TEU (twenty-foot equivalent unit) is close to $9,000 per day, and for a 4,250 TEU, it is close to $15,000 per day. From here, we extrapolated the long-term charter rates for Navios’s container fleet. This works out to be $21,000, $24,000, and $31,000 per day for 6,800 TEUs, 8,204 TEUs, and 13,100 TEUs, respectively.
To calculate the present value of the charter premium, we will have to use a discount rate. The discount rate should take into account the time value of money and the uncertainty involved in the generation of future cash flows. This rate is also influenced by the rate of return from other opportunities with similar risk. Therefore, it is mainly determined by the quality of the counterparty and the rates available on alternative investments. Discount rates also change with the economic cycle. Right now the BofA High Yield index is at 10%. These are returns for very risky investments. The cost of equity for dry bulkers, on the other hand, would be close to 6.8%. Navios generally has contracts with strong counterparties. So, we’ll take a discount rate of 8%, lower than the high yield and higher than the cost of equity, to compensate for the current volatile dry bulk market.
In the next part of this series, we’ll sum up our analysis by looking at NMM’s charter-adjusted NAV (net asset value) and see how it compares with its stock price.