Does NMM’s Net Asset Value Change with Different Assumptions?
Discount rate sensitivity
For discounting charter premiums, we’ve used a discount rate of 8%, however, depending on the investors’ risk assessment of Navios Maritime Partners’ (NMM) counterparties and returns from alternative investments with similar risk characteristics, they could use a higher or a lower discount rate.
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We have used a range of 5%–11% for the sensitivity analysis. While the present value would have been higher by 21% had we used a discount rate of 5%, it would have been 17% lower at a discount rate of 11%.
Vessel values sensitivity
The prices of secondhand dry bulk vessels are also changing very rapidly these days, mainly due to the pressure on freight rates. In some cases, banks are pressuring dry bulk companies to sell vessels at very low prices. To take this into consideration, we’ve considered how the changes in vessel values could impact the NAV (net asset value) of Navios Maritime Partners.
The table above shows the sensitivity of NAV to 5% and 10% higher or lower vessel values. In the short term, vessel values could have more downside as banks force owners to go for distressed sales as loan-to-value covenants approach breach levels. Some owners might even sell to create liquidity for the downturn, leading to further pressure. However, since the current rates are not sustainable in the long term, the vessel values might rebound. Also, since so many vessels will enter the market at once, the rates realized could be even lower. Investors should consider factors that impact the values of secondhand vessels to calculate their own sensitivity.
Time charter rates
Time charter rates also have a great bearing on the NAV of a company. While the current time charter rates are very low by historical standards, the current supply-demand mismatch scenario is unprecedented in its magnitude. This could lead to more pressure on time charter rates in the short term. However, right now owners are running at very depressed rates, which are unsustainable in the longer term. To limit the downside to rates, owners are talking about laying up ships and bearing the basic maintenance expenses rather than operating at loss.
Investors should note that since we consider the difference between the contract rate, which is fixed, and time charter rates, which are variable, any downside in time charter rates should lead to an expansion in the contract premium, which could offset the lower asset values.
Lower vessel values are impacting dry bulk (SEA) names such as Diana Shipping (DSX), Ship Finance International (SFL), and Navios Maritime Holdings (NM). SFL forms 3.3% of SEA’s holdings. Investors interested in broad exposure to industrials can invest in the SPDR Dow Jones Industrial Average ETF (DIA).