Thesis:

We recommend investors buy the bonds of Navios Logistics, the 7 ¼% Senior Notes due 2022, which we believe are more than covered (based on recent market transactions) and have a near-term catalyst for takeout.

Navios Holdings (NM) Overview:

To begin, the Navios Maritime Holdings (NM) credit situation is complicated. The intricacies of the story, combined with the spotty track-record of shipping in general (a famous career “widow-marker”), eliminates most traditional High Yield funds; hence the opportunity. 

Navios (NM) is in one part a shipping business and one part a capital markets operation centered on the company’s CEO, Angeliki Frangou. I will do my best not to rehash publically available information, but NM owns and operates a fleet of Dry Bulk vessels as follows:

In addition to its core Dry Bulk operations, Navios also holds stakes in a constellation of shipping companies, including the following:

• Navios Partners (NMM). Navios Partners owns and operates 37 vessels including 32 Dry Bulk ships (9.8 year average age vs. Industry Average 9.9 years) and five Container ships (12.8 years vs. 12.5). Through 1Q19, NMM has contracted 84.8% of its available days in 2019 and 36.2% in 2020.

  NMM has roughly $505mn of debt outstanding, primarily consisting of a $412.8mn Term Loan B due September 2020. We calculate leverage at roughly 4.0x as 3/31/2019 based on LTM EBITDA in the $111mn.

  NM owns 20.4% of Navios Partners, including a 2.0% GP stake.

• Navios Maritime Containers (NMCI). NCMI owns 30 container ships (25 Baby Panamaxes and 5 Panamaxes) with an average age of 10.6 years. Typifying the company’s ability to create value through the capital markets, Navios acquired the 14 container ships at the foundation of NMCI from Rickmers Maritime in March 2017 (a trough in the container industry) for roughly $113mn.

   

   

   

  NMM owns 33.5% of NMCI and NM owns 3.7%, but elects to consolidate its financials. Originally traded OTC in Norway, the entity moved to the Nasdaq at the end of 2018.

• Navios Acquisition Corp (NNA). NNA owns and operates a fleet of 42 vessels, including 14 VLCC, 8 LR1, 18 MR2 and 2 Chemical tankers with an average age of 7.9 years. In December 2018, NNA merged with another Navios entity, Navios Midstream Partners (NAP), making it a wholly-owned subsidiary of Navios Acquisition.  NM owns 36% of NNA’s equity.

• Navios Europe I. In 2013, Navios inked a deal to acquire ten vessels (five container and five product tankers) from debtors of HSH Nordbank—the former German ship-lending giant. The initial purchase price included $128.7mn of cash and the assumption of $173.4mn of HSH Sub Loans. Navios funded its equity with $10mn of NM cash and $120mn of senior bank financing (with first priority on the ships). Cash flows and/or asset sales of the ships will repay the subordinate loans and Navios would not be liable for any potential unpaid balances.

  Navios has earned a 12.7% preferred return on its $10mn investment as well as a preferred return on the sale of the vessels. Navios receives 20% of the cash flow until the Sub Loans are repaid and then 100% of any excess proceeds.

  NM, NNA, and NMM own 47.5%, 47.5% and 5%, respectively, of Europe I. As of 3/31/2019, the NM held Europe on its books at $4.75mn. 

• Navios Europe II. Mirroring the earlier transaction, in 2015 Navios and HSH Nordbank creditors created another joint venture to acquire 14 vessels (seven dry bulk and seven container), creating Navios Europe II. The purchase price of $225mn includes $143.5mn in equity (comprising $14mn of NM cash and $135mn senior bank debt) and the assumption of $183.5mn of Subordinated HSH Loans.

  Similar to Europe I, the JV receives a preferred return on its $14mn investment and 100% of the excess proceeds after repayment of the subordinated notes.

  NM, NNA, and NMM own 47.5%, 47.5% and 5%, respectively, of Europe II. As of 3/31/2019, the NM held Europe at $4.75mn. 

• Navios Logistics. We believe the balance of Navios non-core asset value resides in the company’s South American Logistic business, which will be the balance of the write-up going forward. 

Overview Navios Logistics

Navios Logistics was formed in 2008 when a legacy Navios entity (Corporacion Navios Sociedad Anonima) combined with the Horamar Group (a family owned barging business), to form a broad-based South American transportation and logistics business.

As part of the transaction, Navios Maritime Holdings invested $112.2mn and contributed its CNSA assets in exchange for a 63.8% stake in the combined business while Horamar invested $112.2mn of cash and put in its legacy assets in exchange for 36.2% ownership in Navios Logistics. These ownership percentages remain in place today. 

Overview of Navios Logistics Assets:

Navios Logistics operates and reports three segment:

Port Terminals:

• Uruguay Port Terminal. Navios owns and operates the largest independent bulk transfer and storage terminal in Uruguay, with two port terminals, one for agriculture and forest-related product and one for mineral-related products. The grain terminal currently has eight million tons transshipment capacity and the iron ore terminal has 10 million ton capacity.

   

   

  They are located it the Nueva Palmira port (roughly 270km from Montevideo), which provides two structural advantages. The first being its location in the Free Port and Free Zone make the port free of Uruguay taxes. The second, and perhaps most important, being its location at the end of the Paraguay- Paraguay-Parana waterways is ideally positioned to capture to serve as transshipment point:

The Nueva Palmira offers structural advantage over competing ports in the region:

O Santa Fe is located further up-river, which lowers expensive barging costs, but mainly ships grains, containers and some general cargo and has minimal iron ore infrastructure. The port has been dredged to 25 feet, but would require further dredging to become viable for iron ore.

â—‹ San Lorenzo port has a modern terminal for grain export, agriculture by products and veg oil, but not designed for handling iron ore

â—‹ Ibicuy is located further down river, which would entails higher barging costs, but had been inoperable since September 2011 due to the collapse of the New Quay terminal and only recently has begun operations again. Roughly 250km downstream from Rosario, shipments require higher barging expense than competing port locations.

Among the most viable competitors to Nueva Palmira, particularly as it pertains to iron ore, include the Rosario port operated by Terminal Puerto Rosario (TPR), a private company, which currently performs transshipping and storage for Vale as well.

Trade in Uruguay has benefitted from a number of macro trends over roughly the last two decades. The devaluation of Brazilian real in 1999 and Argentine peso in Dec. 2001 caused Uruguay to undergo large real depreciation versus the USD, which in time boosted global exports. Additionally, regional trade has strongly benefitted from China, which has grown to become Uruguay’s top export customer.

Source: Uruguay trade competitiveness diagnostic, World Bank

In part driven by Chinese export demands, prices of food commodities increase sharply from 2003-2012, with soy more than doubling. By 2011, roughly 50% of Uruguay’s agricultural land was dedicated to soy, which now represents roughly 15.3% of total exports.

• Paraguay Port Terminal. Navios Logistics owns and operates an up-river port terminal with tank storage for refined petroleum products, oil and gas in San Antonio, Paraguay, roughly 17 miles by river from capital of Asuncion. As a land-locked, non-oil producing country, this terminal represents a strategically important asset for Paraguay.  

Barge Business:

• The Navios Logistic barge division comprises 336 vessels, servicing river transportation markets in Argentina, Bolivia, Brazil, Paraguay, and Uruguay. Customers contract the vessels on a either a time charter or contract of affreightment (CofA) basis to transport both liquid and dry cargo. Their existing fleet includes 27 pushboats, 272 dry barges, 34 tank barges and three LPG barges. The barge segment generated LTM EBITDA of $14.5mn (roughly 16.4% of total).

Cabotage: 

• The cabotage division services major oil and trading companies in the region, transporting petroleum products along the South American coast. The fleet consists of six oceangoing product tankers, one bunker vessel, and one river and estuary product tanker. Cabotage generated $13.1mn of EBITDA (14.8% of total).

Overview on Hidrovia

Navios Logistics operates in the Hidrovia region of South America. The Paraguay-Parana Rivers represent the main transportation channels for the region, allowing more than 1,700 miles of inland navigation within South America and supporting maritime navigation (mid-sized bulk) in the other reaches (in the first 310 miles).

Of that area, only 14% of the national roads were paved as of 2006 (admittedly a dated figure, but directionally correct).   

By country, Bolivia largely exports bulk commodities through the channel. For Brazil, the north-south river route provides a route for ore (iron and manganese) and oilseed generated close to Paraguay River and may prove more efficient than shipping to its Atlantic ports via east-west surface transport. The river network is a vital import-export conduit for landlocked Paraguay.  

Argentina moves domestic dry bulk from northern regions to transfer areas and facilitates Paraguayan and Bolivian imports (fuel, wheat) along the river. It also receives freight from upstream countries for processing (soy, iron ore) and serves as link to transfer freight to oceangoing. Uruguay receives freight (dry bulk and containers) from upstream countries and transfers to oceangoing vessels.

The river is essential to northern Argentina and southern Paraguay, which have spare road networks and few inland accesses and few rail connections.

Transport demand largely is composed of soy and its byproducts (45%), oil and its by-products (20%) and iron and manganese (18%). 

Hidrovia Overview: Iron Ore

Understanding Iron Ore in the region provides an important backdrop for the Navios Logistic story. The Mutum and Urucum deposits in Bolivia and Brazil have an estimated potential of 40 billon tons of iron ore, which, in theory represents trillions of dollar of value. However, the ore is thousands of miles from port, which are, in turn, +10,000 miles from overseas markets.

Vale owns two mines and two plants located in the city of Corumba, (in the state of Mato Grosso do Sul) Brazil. The company reports these mines in its financial statements as its “Midwestern System.” Vale conducts open-pit mining operations as well as “run-of-mine” standard crushing and classification beneficiation to produce lump ore and sinter feed. The company transports ore by barges along the Paraguay-Parana River to transhippers (including Navios Logistics) in Nueva Palmira in Uruguay.

With the decline in iron ore prices in recent years (absent the recent spike), Vale has reduced production significantly in the region:

Underscoring their pull-back form the region, Vale has not assigned a value to these reserves since 2015, stating that the Urucum and Corumba mines are not “economically viable based-on three-year average historical prices.”

With the Vale pullback, iron ore tons shipped on the river have declined markedly:

The distance of the Corumbia mines from a port facility makes their economic viability challenging. It costs roughly $29.50 per ton to barge the iron ore to a terminal and therefore the mines require high prices to operate profitably:

Source: Feasibility Study on Transport of Iron Ore Using the Paraguay-Parana River System

Fortunately, Navios has largely shielded itself from this math.

In September 2013, Navios inked a long-term supply agreement with Vale to process iron ore and manganese at the Nueva Palmira port terminal facility for 20 years (with a 10 year extension option).

The contract gives Vale the right of first refusal to ship up to five million tons of cargo, and permission to process up to six million tons, per annum. More importantly, the contract grants Navios a Minimum Guaranteed Quantity (“MGQ”) of 4 million tons per year, requiring Vale to provide make whole payments for any shipments shortfalls.

Despite Vale’s best efforts, termination rights under the contract are limited. In 2016 Vale sued to get out of the contract, but Navios ultimately prevailed (after a lengthy legal process) in arbitration in February 2017.

Hidrovia Overview: Soy

Soy represents the other key commodity to the Navios Logistics story.

From a high-level, soybean markets have been pushed and pulled by geopolitical trade tensions in recent months/years. U.S. farmers shipped roughly $21bn of soy bean to China in 2017 before volumes dropped nearly 74% last year due to escalating trade tensions:

Source: Bloomberg

South America, broadly, and Hidrovia region, in particular, are well positioned to back-fill the volumes lost by U.S. farmers. The near-term outlook based on current crop year looks particularly favorable. The soybean harvest for Argentina is forecast as the highest in 19 years and Brazil is enjoying a similarly robust growing season:

Source: AgRural Commodities Agrícolas,

While trade tension will abate (hopefully), soy exports from South America to Asia remain on a solid long-term structural trajectory. Chinese oilseed consumption has grown significantly in the last decade driven by expansion in the livestock industry, as it has transitioned into large-scale production. As population continues to grow, there is little to believe these long-term trends will reverse:

Hidrovia Overview: Recent growth in trade  

Changes in climate cycles affecting river depth have contributed to growth in trade flows in recent decades. Specifically, minimum depth between Corumba and Santa Fe was around 10 feet 1940-1965, only 5 ½ feet between 1965 and 1975 but has increased to 13 ½ feet between 1975 and 2000. Please see the link for the reference study (https://bit.ly/31SGCcI).

Partially due to these structural changes in the waterway, tonnage has increased from under 1.0 tons prior to 1990, to 2.0 to 2.5mn tons per year between 1990 and 1995 and now to the 14mn tons context today:

Source: Southern Cone Inland Waterways Transportation Study, The World Bank

Despite this growth, the Paraguay-Parana River has its optional challenges. The roughly 1,500-barges currently operating on the Paraguay-Parana could ship volumes up to 28mn tons per year—substantially larger than the current flows of 14mn tons. Much of this underproduction stems from structural limitations of the river.

First, points north of Santa Fe only allows for depth of up 8 feet, limiting shipment capacity. Additionally, stretches north of Corrientes, Argentina suffer from seasonality, which limits barge traffic three months of the year when water depth drop to less than seven feet:

Further, several critical points force convoys to fraction (breaking into smaller groups) limiting their efficiency, including the Tamengo channel where a large pipeline crosses the Paraguay River at the Brazilian border.

As for the ports themselves, south of Santa Fe, annual depths are up to 34 feet at Rosario and up to 28 feet closer to Santa Fe. Shipments on Panamax bulk carriers with dwt of 75,000 dwt capacity can only fill to 40,000 dwt due to draft limitations. These ships can travel to Tubarao, Brazil for additional tons or receive floating transshipments in Zona Alpha (from Handysize feeder ships) to decrease the long freight shipping costs, but these steps add additional times/costs.

Despite these impediments, trade along the river network has grown dramatically (again, tons were under 1.0mn in 1990) and are forecasted to continue growing:

Source: Parana-Paraguay Rivers Inland Water, PIANC 2018

Navios Logistics owns keys pieces of the infrastructure along this increasing important waterway.

Valuation of Logistics

In early June 2019, Navios attempted to unlock value within the Logistic complex by launching a bond deal backed by the cash flows from the Vale transaction. As part of the deal, Navios proposed restructuring Logistics, creating two new entities, CNSA, the owner of the Vale contract and iron-ore port, and Granos, the owners of the grain terminal; Granos would serve as operator of both terminals as well. 

Navios Logistics launched the bonds deal with price-talk in the 7.0% context (Morgan Stanley as underwriters), but the book got filled at 8.0%. At that level, Navios decided to pull the deal, viewing the cost of capital as too high. The proposed transaction, however, provided a market valuation on portions of the Logistics business.

Applying an 8.0% discount rate (the rate implied by the potential bond deal) to the Vale cash flows and a 2.0% inflation estimate (the contract is subject to annual increases based on rate of inflation in the U.S. and rate of salary inflation in Uruguay) implies an NPV of the bonds as $476.5mn:

Assuming the market underwrote the deal with a LTV of 75% would imply an Enterprise Value from the Vale contact of $635mn. Based on CNSA’s LTM EBITDA of $43.2mn this implies as EV/EBITDA of 14.7x:

The CNSA deal (although not executed) provides a tangible market-based valuation for the CNSA assets. Navios’ decision to pull the deal (believing they could get a higher value elsewhere) suggests this EV is conservative.  

Further, we highlight that only the cash flows from the Vale minimum guarantees would have backed the prospective CNSA deal. Any volumes above Vale’s tons 4mn (again, the port has up to 10mn capacity) would have been captured by the Logistics complex (specifically the Granos box). Hence, the market valuation of CNSA represents just a portion, but not all, of the value in the iron ore Port Terminal facility.

With Vale currently shipping under 2mn tons through the port, we ascribe zero value to these potential additional volumes. That said, Vale has had some significant operating issues this year with the Brumadinho mine accident in January, which knocked around roughly by roughly 50 to 75mn tons of production; for context, in 2018, Vale produced 384.6mn tons.  

Broadly, we view additional iron ore capacity as option value. The current backdrop—with iron prices surging and Vale’s production down—pushes that optionality higher. This unquestionably represents incremental value to the Logistic complex.

As for the rest of the complex, Logistic reported total Port Terminal LTM EBITDA 3/31/2019 of $60.8mn. Backing off the $43.2mn for CNSA, implies $15.1mn of residual EBITDA. Applying a conservative, yet defensible 10x, would value implies $150.9mn of value for the rest of the Terminal assets:

We value the Cabotage business using a 5.0x multiple on the three-year average EBITDA of $11.1mn (to account for the variability of the business), which suggests a $55.4mn valuation:

Applying a similar methodology to the barge business suggests nearly $100mn of value:

The market’s recent CNSA plus extremely conservative valuation for the remaining businesses implies a total valuation for Logistics of around $941.2mn:

Investment Opportunity

Navios had earmarked proceeds from the CNSA deal to repay the Navios Logistic 7 ¼% Senior Notes due 2022. Bonds are callable at 101.813 (with their par drop in May 2020) and currently trade 97.75 - 98.50 (3m x 3mn). Based on a 98 price, we provide the YTW over the next 12 months as follows:

Returns for the Logistics bond range from “phenomenal” to “good” depending on timing. Given the company’s incentive to get a deal done, though, we believe bonds are attractive as a near-term takeout candidate, pushing IRR’s toward the high-end of the range.

Based on the maturities at the Navios Holdings level, the Navios complex is coming to a head. There are two bond at Holding, the 7 3/8% First Priority Ship Mortgage Notes due 2022, and the 11 ¼% Notes due 2022 back by the company’s equity stakes.

While not “getting into the weeds” on these bonds (perhaps for another write up), the company’s NM 11 ¼% notes having “springing maturity” language that states that if more than $130mn of the 7 3/8% Ship Notes remain outstanding as of September 2021, the 11 ½% come due. Effectively the 11 ¼% are a year away from becoming “Current.”

For Navios to be able to refi its Holdings level debt, they will need to tap the equity at Logistics. The only way to access that value is for the Logistic bonds to come out. So, again, we find the Logistic bonds extremely compelling risk-adjusted return given that the Vale contract/CNSA valuation alone covers the debt (~$650mn of EV vs. $534mn).