Holding a large debt overhang that deterred traditional investors, Navios Maritime Holdings met several times with investors focused on distressed companies to seek a way out.
But what they offered the New York-listed bulker owner left little to be desired. Their terms were a "heads I win, tails you lose" proposition, according to a source with knowledge of the situation.
Last week's refinancing, backed by a loan from a private company affiliated with chief executive and leading shareholder Angeliki Frangou, is being described as one of the few options available to the company facing what the source said was "several years in the wilderness of distress".
And the other options — bankruptcy or a deal with hedge funds that would give them the "keys to the company" — were seen as more painful to shareholders than the terms of the related-party deal that was eventually forged.
As TradeWinds has reported, Navios Holdings' shares plunged 26.5% in the first day after the $550m refinancing deal was announced because the convertible debentures used to pay Frangou-linked N Shipmanagement Acquisition (NSM) risked diluting the stakes of existing shareholders.
But in a conference call with analysts, chief financial officer George Achniotis said regular financing was out of reach because of Navios Holdings, leaving only Chapter 11 bankruptcy restructuring or a deal with distressed funds as the only two other options.
But both those options would ultimately wipe out shareholders, he said.
"I agree that there weren't many alternatives, especially with the significant amount of capital being brought in with not that much collateral cover," responded Omar Nokta, an analyst at Clarksons Platou Securities.
Dilution was unavoidable, the source with knowledge of the situation said.
The track record of shipping companies in Chapter 11 has not yielded positive results for shareholders, with equity often swept away in the ultimate restructuring.
Distressed investors had already taken a position in Navios Holdings' bonds and their demands suggested they ultimately wanted the keys to the company if markets "hiccupped", the source said.
"In fact, they were looking to get the keys even if the market didn’t hiccup," he said.
The funds were seeking high coupons above 10%, aggressive financial covenants and loan-to-value triggers and excess cash flow sweeps, and any deal would block the ability to refresh the fleet as it aged. To boot, they also demanded so-called equity kickers, or options to take stakes in the company, in the form of penny warrants "that would involve massive dilution", the source said.
As TradeWinds has reported, NSM provided two loans totalling nearly $263m.
Those deals ultimately paved the way for an additional $210m in loans from Hamburg Commercial Bank, BNP Paribas and Credit Agricole, and $77m in financing through sale-and-leaseback deals.
The company has reported a return to the black in the third quarter of the year.
| Q3 2021 | Q3 2020 | |
| Revenue | $168m | $126m |
| Ebitda | $116.1m | $48m |
| Adjusted Ebitda | $116.1m | $59.9m |
| Net income | $59.8m | -$10.1m |
| Adjusted net income | $59.8m | $1.78m |
| Earnings per share | $3.67 | -$0.88 |
| Adjusted EPS | $3.67 | $0.04 |
The package allows the company to pay off $614m in notes payments that are scheduled to come due in January, in addition to a $50m redemption of notes that mature in August.
The deal with NSM included a $300m release in collateral that allowed the financing to take place.
Though it includes a $24m fee to NSM paid in debentures, there are no cash payments for 18 months.
While the deal will doubtlessly raise questions about related-party entanglements, the company noted that it was approved by a special committee of disinterested board members who negotiated with NSM.
The source said NSM was the only lender willing to provide what was effectively unsecured loans and commit additional at-risk capital, which he said speaks to the commitment of Frangou.
And it paved the way for additional financing.
"A group of ship lending banks lined up around the principal — Ms Frangou — and effectively said, 'If you are in, we will take the risk'," he said. "And this credibility — of the related party — is what made this whole transaction a success."
Frangou told analysts recently that healthy bulker markets should allow the company to pay its remaining $105m in bonds due in August.
And the financing package opens up new options.
"It has given the company an 18-month runway in a very good market," Achniotis told analysts. "So we have the chance to delever, build up our cash position, expand or renew the fleet and revisit our capital structure in a couple of years."
