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S&P Downgrades Navios Maritime Partners (NMM) to 'B'; Outlook is Negative

June 13, 2016 11:01 AM EDT

S&P Global Ratings lowered its long-term corporate credit rating on Navios Maritime Partners L.P. (NYSE: NMM)(Navios Partners) to 'B' from 'B+'. The outlook is negative.

At the same time, we lowered our issue rating on the company's senior secured debt to 'B' from 'BB-'. We revised down the recovery rating to '3' from '2', reflecting our expectation of meaningful recovery in the 50%-70% range in the event of payment default.

The downgrade reflects our expectation that Navios Partners will continue facing depressed drybulk and container shipping industry conditions that we anticipate will remain so over the next 12 months. The downgrade also reflects the potential further--and presently unpredictable--cash drain on Navios Partners to remedy loan-to-value covenant breaches, amid an environment characterized by very low vessel values, which we cannot confidently quantify and forecast in our liquidity analysis. We note that Navios Partners has recently undertaken a few measures to avoid breaching its covenants, including a $28.4 million cash prepayment of an entire ABN AMRO loan and a $25 million cash prepayment under a term loan B. Dividend suspension--and therefore cash flow savings--provides flexibility for Navios Partners, but we see limited leeway for the liquidity sources-to-uses ratio to remain above 1x, which is commensurate with the current 'B' rating. We calculate, for example, that a drop in the term loan B's collateral value by 15% (from the value as of March 31, 2016) would result in a liquidity shortfall for Navios Partners (absent corrective actions).

Furthermore, the weak credit standing of Navios Partners' crucial counterparties under the long-term charter agreements, namely South Korean container liner Hyundai Merchant Marine (HMM; of which charters accounted for 27% of Navios Partners' EBITDA in 2015) and South Korean ship operator Hanjin Shipping (Hanjin; 11%)--both counterparties are currently undergoing financial restructuring--inevitably poses a risk of amendments to the existing contracts and ensuing strain on Navios Partners' cash flows and liquidity.

The combination of these factors prompted us to apply a negative comparable rating analysis modifier. This, in turn, led us to lower the rating on Navios Partners to 'B' from 'B+'.

The negative outlook reflects our view that Navios Partners might find it difficult to preserve the rating-commensurate liquidity profile, and that there is mounting refinancing risk given a large bullet debt repayment due June 2018.

We could lower the rating if the vessel values drop considerably below their current historical lows resulting in a further cash drain on Navios Partners to remedy loan-to-value covenant breaches, if the company's EBITDA trends significantly below our base-case forecast (for example due to material amendments to its existing charter agreements), and consequently if the company appears unable to maintain the liquidity sources-to-uses ratio above 1.0x.

We could also downgrade Navios Partners if we believed that the company would not be able to refinance the US$386 million term loan B due June 2018 in a timely fashion, which we consider to be at least 12 months ahead of the maturity.

We could revise the outlook to stable if the company achieves a more comfortable level of headroom under its loan-to-value covenants and if the possibility of the sources-to-uses ratio falling below 1.0x is remote. 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 6%.



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