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

Standard & Poor's Ratings Services lowered to 'B' from 'B+' its long-term corporate credit rating on Navios Maritime Holdings Inc. Navios Maritime Holdings (NYSE: NM). The outlook is negative.

At the same time, we lowered our issue rating on the company's senior secured debt to 'B+' from 'BB-'. The recovery rating is unchanged at '2', reflecting our expectation of substantial recovery (in the higher half of the 70%-90% range) in the event of a payment default. We also lowered our issue rating on the senior unsecured debt to 'CCC+' from 'B-'. The recovery rating is unchanged at '6', reflecting our expectation of negligible recovery (0%-10%) in the event of a payment default.

The downgrade reflects our expectation that Navios Holdings will post lower-than-expected operating profits for 2015, resulting in credit metrics that will fall short of our guidelines for the rating. The persistently weak charter rates and uncertain outlook for the dry bulk shipping industry prompted us to revise downward our charter rate assumptions for 2015-2016. Given this environment, we believe that Navios Holdings will not be able to turn around its credit measures in 2016 as previously expected. Dry bulk ship operators face the lowest charter rates seen in the last 20-30 years, as supply growth continues to outstrip demand growth. This has been aggravated recently by significantly weakened commodity imports from China, which is by far the largest global importer of iron ore and one of the largest importers of coal. Because there is no immediate demand-side stimulus and supply-side relief (as the impact from the accelerated scrapping will be likely wiped out by new vessel deliveries), we forecast that there will be no rebound in charter rates in 2016.

Weak industry prospects, combined with the company's large, partly debt-funded capital expenditure (capex) in its South American logistics operations, will lead to credit measures commensurate with the lower end of the highly leveraged financial risk profile in 2015-2016. This, combined with our view of Navios Holdings' business risk profile being at the lower-end of fair, prompted us to apply a negative comparable rating analysis modifier, resulting in a downward revision of the anchor by one-notch.

We forecast Navios Holdings adjusted funds from operations (FFO) to debt and FFO cash interest coverage ratio to be around 2.5% and 1.5x, respectively, in 2015 and for it to remain broadly flat in 2016. In addition, we expect cash flow (after capex and dividends) to be negative in 2016. The company's highly leveraged financial risk profile is further constrained by its high adjusted debt, which mirrors the underlying industry's high capital intensity and the company's track record of large expansionary investments.

We continue to assess Navios Holdings' management and governance as strong, leading to a one-notch uplift to the rating. We believe that Navios Holdings has a sound management team with substantial industry experience and expertise, and a demonstrated track record in operational effectiveness and treasury management compared with industry peers, particularly during the prolonged industry downturn.

Our assessment of Navios Holdings' business risk profile as fair continues to be constrained by our overall view of the shipping industry as high risk. This stems from the industry's capital intensity, high fragmentation, frequent imbalances between demand and supply, lack of meaningful supply discipline, and volatility in charter rates and vessel values. Further constraints to our view include the prolonged sluggish charter rate environment, in particular in the dry bulk sector, which we believe will not recover in the short term, as the industry's demand and supply equilibrium remains under strain.

We consider these risks to be partly offset by Navios Holdings' competitive position, which we assess as satisfactory. We believe that Navios Holdings' competitive operating breakeven rates and limited exposure to fluctuations in operating costs, in particular for bunker fuel, through time-charter contracts, somewhat counterbalance the industry's cyclical swings. We also believe that Navios Holdings' competitive position benefits from its solid operating track record, particularly in the context of the very difficult industry conditions; its expanding and more predictable-than-traditional-shipping logistics business in South America; its dividend-paying holdings in affiliates; and its solid reputation as a quality operator of a modern, attractive, and cost-efficient vessel fleet.

In our base-case scenario, we assume:

• Global economic growth of 3.7% in 2016 and 3.9% in 2017, after 3.4% this year--though average GDP growth rates hide a lot of variation: China (a key engine of shipping growth) and many of the emerging market economies are slowing down; and Brazil and Russia are in recessions; but the U.S., the eurozone, and Japan are all picking up (see "Stress-Testing Global Growth," published on Sept. 30, 2015). Our assumptions for Navios Holdings incorporate growth forecasts for the major contributors to trade volumes--in Europe, the U.S., and Asia-Pacific--because of the global nature of shipping sector demand.
• Moderate slowdown in economic growth in the Asia-Pacific region, the largest importer of iron ore and coal, to 5.4% in 2015 (compared with 5.6% in 2014). We expect this to be followed by stabilization at 5.3%-5.4% in 2016 and 2017, with China's growth cooling to 6.8% in 2015, 6.3% in 2016 and 6.1% in 2017, down from 7.4% in 2014 (see "Asia-Pacific Growth Slips Again As China Wobbles And Trade Tumbles Further," published on Sept. 9, 2015).
• Contracted vessels to perform in accordance with the contracted daily rate. Revenue calculations are based on 360 operating days a year.Time charter rates for Capesize ships of $11,000 per day in 2015, $11,000/day in 2016, and $13,000/day in 2017 (as compared with the industry average rate of about $22,000 per day in 2014, according to Clarkson Research). For Panamax and Handymax we assume rates of $8,000/day in 2015, $8,000/day in 2016, and $10,000/day in 2017 (as compared with the industry average rate of $11,000-$12,000/day in 2014, according to Clarkson Research).
• Higher EBITDA from Navios Holdings' majority-owned subsidiary Navios South American Logistics Inc. (Navios Logistics), reflecting the start of operations of the new convoys in the second half of 2015. Improving operating margins in 2015, as Navios Logistics continues to enhance its service mix among its operations and benefits from the increased size. From 2016, gains from a major service contract with Vale.
• Lower dividends received from nonconsolidated affiliates, stemming from slower-than-previously-anticipated earnings growth at dry bulk and containership operator Navios Maritime Partners L.P.
• Remaining capex of about $18 million in 2015 and $150 million in 2016. Navios Holdings' expansionary investments will amount to about $150 million in 2016 and reflect mostly the port expansion in Uruguay and acquisition of barges and push boats. Navios Holdings will spend about $60 million to buy two new vessels to be paid/delivered in the first quarter of 2016. Capex will be largely funded by new bank loans.

Based on these assumptions, we arrive at the following credit measures:

• A weighted average ratio of Standard & Poor's-adjusted FFO to debt of 2%-3% in 2015-2016.
• A ratio of FFO cash interest coverage of about 1.5x in 2015, somewhat improving to about 1.6x in 2016.

The negative outlook primarily reflects the persistently high cyclical pressure on dry bulk charter rates and our forecast that the rates will not improve from their current historical lows in the next 12 months. Because of our view of the dry bulk shipping sector's uncertain prospects, there is a one-in-three chance that the dry bulk charter rates will underperform against our base case. If this happens it will be difficult for Navios Holdings to maintain its rating-commensurate credit profile and adequate liquidity position.

In our view, a downgrade would primarily stem from a prolonged downturn in the dry bulk shipping industry, without prospects for a recovery in charter rates from 2017. We consider that continually low charter rates would prevent Navios Holdings from achieving favorable employment for vessels up for re-charter, and those not yet delivered and contracted. We would consider a downgrade if we believe that the company is continuing to generate negative free cash flow, leading to a weak liquidity assessment.

Likewise, the rating may come under pressure if we regard management's operating strategy, risk management, and its stance toward the company as no longer consistent with our strong management and governance assessment.

We could revise the outlook to stable if we see that Navios Holdings' operating performance has rebounded, if the company starts generating positive free operating cash flow, and if it achieves a sustained an adequate liquidity profile.

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