As the markets have been focused on the Fed, the Baltic Dry Index has been on an amazing run in the past three weeks. As of Thursday's fixing, the BDI sits at 937, an astounding 17% gain in the past 10 days. As has happened so many times, dry bulk ships are misplaced going into the fall and charterers are having to scramble to find vessels for their cargoes, especially coal.
Shares of Navios Maritime (NM) have joined the dry bulk rally I wrote about in my Real Money column Monday. As well as the rising BDI lifting all boats, Navios' shares may be buoyed by two corporate announcements Monday evening.
Navios announced:
- A tender offer for all Series G and Series H preferreds at a cash value (shares can also be elected) of $5.85 and $5.75, respectively -- par value on both series is $25.
- A $70 million line of credit from affiliate company Navios Acquisition (NNA) to Navios Holdings.
Since Navios is currently not paying preferred dividends, the company's bond covenants prevent it from buying back stock. As the company bought back $32 million in debt -- at about 50 cents on the dollar -- earlier this quarter, it is my opinion that Navios CEO Angeliki Frangou and her team believe all of Navios securities to be undervalued, including the common.
Also, the preferred dividends are accumulating in arrears and thus each quarter that passes increases the liability. That liability would have to be retroactively satisfied before any real remaking of Navios Holdings' balance sheet -- presumably funded in part by cash-rich Navios Acquisition -- could occur.
Getting rid of the preferreds would remove restrictive covenants in a situation where their stock (even after a massive rally Thursday) is trading at $1.32 and the company's book value on June 30 was $10.21 per share.
That is not a typo. Navios shares are trading at nearly a 90% discount to book.
Obviously, much of the discount afforded to Navios is due to the market's perception that the earnings power of its ships (accounted for at historical cost) is much lower than the reported asset value. Every day that the BDI jumps, though, the implicit resale value of Navios ships increases as well, and before too long that perceived shortfall between Navios fleet's market value and its carrying value may not be so large.
So, Navios offered a premium (10% cash/5% stock) to the 20-day trailing VWAP of the Series G and H, and if more than two-thirds of holders tender their shares, Navios' "preferred bomb" is effectively defused.
Navios Series G preferreds are my Real Money Best Idea. I put on the trade in late January at $3.60, so a $5.85 cash payout in October (the tender offer expires on Oct. 17) would be a healthy profit.
But that may not be the end of the story. With NM shares having jumped to $1.32, the exchange value (4.77 shares of NM per NM-G share) of the offer for the Series G shares is now $6.30, well in excess of the offer's cash value, and well in excess of the Series G's closing price Thursday of $5.35.
So it will be interesting to see how the Navios preferred share tender plays out. With the Series H trading 6x its normal volume Thursday, it appears that risk arbitrageurs may be playing this offer, making it all the more intriguing.
So, my clients and I will just keep holding our Navios preferreds, watching the BDI rise -- which, other things equal, makes any Navios security more valuable -- and hoping the shipping markets continue to steam toward equilibrium.
