Monday, February 02, 2009
Angeliki Frangou, Chairman and CEO of Navios Maritime Partners L.P. (NYSE: NMM) Discusses the Dry Bulk Sector and NMM
Interview With Barry Parker of BDP1 Connect
February 02, 2009: 09:00 AM ET
Angeliki Frangou, Chairman and CEO of Navios Maritime Partners (NYSE: NMM) was interviewed today by Barry D. Parker of BDP1 Connect. The interview focused on the development of Navios Maritime Partners and on the dry bulk sector in general. Please find below the interview in its entirety. An audio file of the interview can also be accessed on www.CapitalLinkShipping.com
Barry Parker: We have with us today Mrs. Angeliki Frangou, the Chairman and CEO of Navios Maritime Partners. Navios Maritime Partners is a publicly traded master limited partnership (NYSE: NMM) formed by Navios Maritime Holdings Inc (NYSE: NM) and is an owner and operator of Capesize and Panamax vessels transporting dry bulk cargoes.
Angeliki, tell us what drives the NMM story. You just had another strong quarter with strong performance and results in line with your expectations, when other companies in your sector have been suffering, showing significant decline in revenues and profitability. Can you explain how you have accomplished this?
Angeliki Frangou: This has to do with our business model which has certain structural advantages over other dry bulk players, virtually all of whom have eliminated dividends.
As you know, Navios Partners operates modern vessels with charters-out averaging approximately 4.4 years. This is especially favorable when you consider that many of our dry bulk companies have less than two years of charter coverage. Thus, when the market dropped precipitously, the charter renewals for our competitors will be particularly damaging for their earnings. In contrast, we can observe the market for a significant time as we have 100% charter coverage for our fleet for 2009 and 2010 and 80% for 2011. Therefore, we expect to be able to charter the vessels that open up at that time in a more favorable market environment.
We have also been selective about our counterparty risk in the form of charter parties. After all, the charter agreement and related cash flow are only as strong as the underlying signature. A piece of paper promising to pay significant amounts is of no value if there is large doubt of payment in difficult markets.
At least as important as the quality of our counterparties is the care we have taken to insure that we will be paid should an unforeseen event overtake one of our charter parties. Moreover, we have insured each of these charters, for the length of the entire agreement, through a double "AA+" rated European Union government entity. The terms of the coverage require that if the charterer does not pay, the insurance kicks in and scheduled payments are made by the insurance company during the remaining term of the charter.
We also have several other structural advantages. Our fleet is relatively young, with an average age of 6 years as compared to the global dry bulk fleet with an average age of 15 years. Also, our operating costs are fixed until November 2009.
Barry Parker: The insurance feature that you mentioned is very interesting. What kind of insurance is it? Is it different from a loss of hire insurance; is it a form of credit type insurance?
Angeliki Frangou: It is credit default insurance. If the counterparty does not perform for any reason and goes into payment default, all we have to show is the non-payment and the insurance kicks in allowing us to collect under it for the duration of the charter.
Barry Parker: This is quite unique. I hope you never have to collect under this insurance but at the same time I am sure it enables everyone to sleep better at night knowing that this type of protection is in place.
Angeliki Frangou: Of course, yes, it does allow a great deal of comfort.
Barry Parker: Why are you increasing your dividend payout, when other companies eliminate or decrease their dividend? Is this sustainable? Would you increase it further in the future?
Angeliki Frangou: We increased our dividend by 4% since Q3 2008 and by 14% from November 2007. So, as you can see, we have a very consistent growth pattern. For Q4 2008, we declared a cash distribution of $0.40 per unit, which is $1.60 on an annualized basis, and this represents an annualized dividend yield of close to 20% at current stock market levels. We have significant forward visibility that allows us to make these determinations. First, Navios Partners operates vessels with charters-out averaging approximately 4.4 years. Second, we have been selective about counterparty risk and have insured each of these charters, for the length of the entire agreement, through a double "AA+" rated European Union government entity. Third, have controlled our operating costs, which are fixed through November 2009 through an agreement and given the current deflationary environment these expenses may be even lower when this agreement expires. We also have a significant capital reserve account with an operating surplus after the replacement capex which further enhances our forward visibility.
Barry Parker: Let's switch now to questions on the industry. Why did we have such a sharp decline in the spot rates for dry bulk shipping? Is this a reflection of lack of trade financing, decreased demand from importing countries or what else?
Angeliki Frangou: In essence trade financing was completely absent in the market in the 4th quarter of 2008. This more than anything else caused the deteriorating of the market. I think from that moment we have seen some recovery.
Rates have rebounded from their low in December with the Baltic Dry Index up more than 50% from 650 to over 1,000. Of course we cannot compare them to their pre-September levels. It will take some time for the market to recover to those levels. There has also been some unclogging of the credit markets.
Dry bulk shipping is essentially a logistics provider to the infrastructure development and the underlying dynamics are healthy for infrastructure development. Urbanization is irreversible. The IMF projects that emerging markets will grow by more than 3% and China by almost 7%. Fiscal stimulus will include significant amount for shovel ready projects. All of these will drive the dry bulk industry.
So I think that should see further recovery in the dry bulk sector especially as of the second half of 2009.
Barry Parker: What is the catalyst that could turn freight rates around? Is it the continuation of investment in infrastructure?
Angeliki Frangou: The drivers in dry bulk are infrastructure development and urbanization. We know that urbanization will continue. China will be growing even in 2009. If you take the latest estimates of the IMF, China's GDP is expected to grow by 7%. This may not seem large in light of China's recent history but it still represents significant growth for one of the world's largest economies. So, urbanization and infrastructure development will kick in and give some vitality to the dry bulk market. It will not happen automatically, it will take some time but the trend is there and I think we saw the worst in the last quarter of 2008.
Barry Parker: How can the Chinese $600 billion stimulus plan affect economic growth in China and demand for commodities?
Angeliki Frangou: We anticipate that this stimulus package will be focused at infrastructure development, as it employs many and continues to create the infrastructure necessary for the urbanization that must be extended. As such, this will benefit dry bulk tremendously. Also, you have to look at what the USA is doing with its close to $900 billion stimulus package, a significant portion of which will go into infrastructure projects. So, all this will ultimately have some effect on the dry bulk market but it will take some time, maybe a couple of quarters.
Barry Parker: Let me now pass from the demand to the supply side of shipping. Have there been a lot of cancelations of new buildings? How will this affect the supply/demand balance in dry bulk shipping?
Angeliki Frangou: Reaching equilibrium for the number of vessels is critical for the health of the dry bulk industry. The underlying dynamics driving our industry, infrastructure development in emerging markets, continue. Today, we are critically reviewing two streams of data -- new builds and scrapping.
In terms of new build vessels, we anticipate that around 50% of new builds previously announced will not be delivered. Ironically, many of these cancellations will be driven by the lack of financing. This lack of financing would affect both the number of shipyards building vessels as well as the number of vessels.
In terms of scrapping, we have seen scrapping greatly accelerate from less than 1/4 of 1% over the past few years to over one percent last year. Scrapping is accelerating as almost 30% of vessels in the water are over 20 years of age... so these vessels are prime candidates to be scrapped and this process is picking up pace. Just to give you an idea, in Q4 2008, it was the first time in recent history that the deliveries of Capesize newbuildings were less than those scrapped.
So, as much as the credit crisis is overall a negative development, when it comes to the supply side, it has a positive effect on the supply side of vessels.
Barry Parker: Let me ask you a final question. Given the insurance you have on your charterers, this is not something you have to worry about, but if we refer to the wider industry, what is the situation with charterers? Are we likely to see more renegotiations / defaults?
Angeliki Frangou: Charterers will ask for relief and there may be some negotiations. However, in the case of Navios we have taken two steps that offer significant protection.
First, we have been extremely selective about the quality of our charter parties. We are virtually the only company with an e credit committee that carefully monitors the credit quality of current charter parties as well as screen proposed charter parties.
Second, we have insured all of our charters with an AA+ EU governmental entity, so we are not compelled to accept any offers. Indeed, under the terms of our insurance, the entire charter is covered -- both in terms of amount as well as over the period, with the insurance company picking up the payments the charter party had to make.