I attended the Capital Link Shipping Conference in NYC this week and was struck by the bullishness around dry bulk. Vessel values are increasing in the secondhand market and long-term charter rates have risen appreciably. Both those indicators are much more reliable than the always-volatile Baltic Dry Index.
At the conference, I talked to shipping guru Mark Suarez of McQuilling Holdings. He noted the strength in freight rates for smaller ships. Those classes -- handysize, supramax, etc. -- carry the so-called minor bulks like grains, soybeans and potash, and the fact that those rates are strong underpins the optimism facing dry bulk. The strength in freight rates is not just being driven by China's insatiable appetite for coal and iron ore; other seaborne commodities are being actively traded as well.
It was one hell of a correction, but as Suarez noted, even the smaller ships are earning rates above "cash break-even" now. So owners are not losing money by having their ships on the water, and this afternoon's London fixing showed the amazing renaissance in dry bulk rates. Here are today's rates versus the year-ago values:
Capesize: $16,966 vs. $2,082
Panamax: $9,404 vs. $3,731
Supramax: $9,327 vs. $4,944
Today's rates are still low by historical standards, and I believe there is more upside for dry bulk rates before the normal, seasonal summer slowdown.
Against that macro backdrop, shares of my Real Money Best Idea, Navios Holdings' Series G Preferreds (NM-G) , continue to perform swimmingly and have passed the 300% gain mark since I recommended them in RM last January.
Navios announced Tuesday another preferred exchange offer. This one's different from the October offer in that there's no option to exchange for cash.
It's merely a share exchange and the terms are better -- 8.25 Navios Maritime (NM) shares for each NM-G; 8.11 NM for NM-H -- than the prior offer. So Navios is sweetening the pot to try to clean the remaining prefs (about $109 million) off its balance sheet.
Ultimately, Navios has to solve the preferred issue to exit "distressed" status. NM-G and NM-H are still acting as a "poison pill" to block any true recapitalization of Navios Holdings. NM's bond prices have improved markedly since last year, trading at 87 cents on the dollar versus the 30- to 40-cent range that prevailed last summer. Also, sister company Navios Partners (NMM) just completed an offering that raised its share capital by more than 50%.
NM-G and NM-H both jumped in Tuesday's trading, and the common shares were sold off. I believe this is the result of some low-level arbitrage by funds attempting to game the deal.
Since NM-G and NM-H were trading substantially above the implied share value of the offer ($13.18/$13.37 for NM-H/G based on NM's closing price of $1.62), I sold off my and my clients' holdings Tuesday.
For those accounts with appropriate risk tolerance, I used the NM-G/NM-H sale proceeds to buy NM common. The exchange offer closes April 18 and I believe NM shares will face pressure ahead of that date, plus the overall markets are getting restless after the four-month-long, one-way move of the Trump Jump.
Clearly, though, money is chasing shipping again. That will underpin NM's value, and if it takes a few months for the market to realize that, then I'll keep buying on dips.
