S&P Downgrades Navios Maritime Holdings (NM) to 'B+'; Outlook Negative

Standard & Poor's Ratings Services said that it had lowered its long-term corporate credit rating on Navios Maritime Partners L.P. (NYSE: NM) to 'B+' from 'BB'. The outlook is negative.

At the same time, we lowered our issue rating on the company's senior secured debt to 'BB-' from 'BB+'. The recovery rating of '2' on this debt is unchanged, reflecting our expectation of substantial recovery in the lower half of the 70%-90% range in the event of payment default.

The downgrade reflects our expectation that Navios Partners will see constrained earnings over 2016-2017 and not achieve credit measures commensurate with the previous 'BB' rating, owing to lower-than-anticipated charter rates in drybulk shipping. This prompted our reassessment of Navios Partners' financial risk profile to aggressive from significant, and the subsequent revision of our anchor for the company to 'b+' from 'bb-'.

The downgrade also reflects our reassessment of Navios Partners' management and governance as satisfactory, compared with strong previously. This is because we consider that the protracted downturn in the drybulk shipping industry has significantly reduced management's ability to enhance the company's fortunes and interrupted its track record of achieving financial goals. Furthermore, we understand that the company faces significantly tightened headroom under its financial covenants, most notably EBITDA interest coverage, and relies on its lender group to obtain an amendment or waiver to avert a potential breach. This is exacerbated by drybulk charter rates that will likely remain at their current severely depressed levels over the next 12-24 months, according to our base case.

The rating on Navios Partners remains constrained by our view of its business risk profile as weak, which in turn reflects our assessment of the shipping industry's high risk. Moreover, the company has relatively narrow, albeit recently improved, business scope and diversity, with a predominant focus on the oversupplied drybulk and container industries, and a fairly concentrated
customer base.

Key credit support to Navios Partners' competitive position, which we assess as fair, comes from its time-charter profile, Furthermore, Navios Partners benefits from its competitive and predictable cost base, with no exposure to volatile bunker fuel prices and other voyage expenses, which are borne by the counterparty, as stipulated in the time-charter agreements.

Our assessment of Navios Partners' financial risk profile as aggressive reflects the prolonged depressed charter rate conditions and the company's gradually increased adjusted debt, which mirrors the underlying industry's high capital intensity and the company's track record of large partly debt-funded expansionary investments. According to our base-case operating scenario, Navios Partners' credit measures will continue to weaken gradually over 2016-2017, as reflected in a weighted average ratio of Standard & Poor's-adjusted funds from operation (FFO) to debt of about 17%-19%, down from
about 20% in 2015.

The negative outlook reflects our view that Navios Partners could be challenged to remain in compliance with its financial covenants, most notably the EBITDA interest coverage one, amid persistently high cyclical pressure on drybulk charter rates without an amendment to allow for a less restrictive covenant threshold. The negative outlook also reflects mounting refinancing risk, with a large bullet debt repayment due June 2018, amid difficult funding conditions.

We could lower the rating within the next few months if the company appears unable to obtain a covenant amendment that ensures increased headroom, combined with the increased likelihood of a likely breach of the covenant. This could occur if drybulk charter rates trend below our base case, resulting in lower-than-expected EBITDA.

Furthermore, we could downgrade Navios Partners if we believed that the company would not be able to refinance the US$411 million-term loan B due in June 2018, in a timely fashion.

We could revise the outlook to stable, if the company achieves a more comfortable level of headroom under its covenant, specifically at least 15%, and it is likely to remain at that level for the foreseeable future. The stable outlook would also depend on timely refinancing of term loan B and the company's ability to maintain its core credit ratios commensurate with the 'B+' rating. Specifically, such ratios would include adjusted FFO to debt of more than 12% on a sustainable basis.

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