Naviera Restricted Group to Receive €50M From Agreed Vessel Sale; Monthly Covid-19 Cash Burn of €2M-€3M; €40M ICO Loan Unsecured, Costs 3% on Average; Price Increases at Start of Year to Remain Despite Low Fuel Costs

Relevant Document:
FY’19 Presentation

Spanish shipping group Naviera Armas’ restricted group would receive about €50 million profit from the agreed sale of a vessel that lies outside of the restricted group, management said on its fourth-quarter earnings call today.

The sale is expected to close on Sept. 30 and the group is looking to sell an additional vessel but a deal has not been agreed yet. Management said that the sale of the two vessels would bring about €60 million to €65 million of cash and confirmed that both vessels to be sold were not part of the collateral package of its bonds.

Liquidity as of April 30 amounted to €30 million which included cash on balance sheet and undrawn amount under the existing RCF. In addition to this, the group has secured a €40 million Spanish government-endorsement program (ICO line) which management said was unsecured, had an average rate of 3% and no covenants. The company had not given any guarantees against the funding, but the line was 70% guaranteed by the Spanish government.

The €40 million ICO funding consists of a €30 million five-year loan, €5 million three-year loan and two new RCF amounting to €2 million and €3 million, respectively, with a three-year maturity, as reported

The company has also renewed its bilateral RCF lines amounting to €12 million for three years. An additional €15 million of liquidity for 2020 came from the deferment of bareboat/time charter payments and the reduction of maintenance capex through the reschedule of dry dockings.

Management said that monthly cash burn due to Covid-19 lockdowns was about €2 million to €3 million in a worst-case scenario. It added that it expects the situation to improve over the coming weeks as the Canary and Baleric islands in which the group operates have been less affected than the rest of Spain and are ahead in reopening the economy. Management said it expects movement between islands will open from mid-June but is confident that the islands can open before. It added that the group was unable to spend any capex due to the lockdown.

An analyst asked if the company would consider buying back the bonds. Management responded that it was not considering buying back the bonds yet as its focus was to stabilize liquidity.

Management was asked if the company was working with Houlihan Lokey to raise more liquidity to which it said it was in touch with Houlihan at the beginning of the lockdown but has since focused on getting the ICO line. It added that if another opportunity arises to raise more liquidity then it will use it, otherwise it will try to get more from the ICO line.

An analyst asked for details of a previously reported shareholder meeting and cash injection from the shareholders. Management said it had to postpone the shareholder meeting due yesterday and will have another meeting once the restrictions are eased. Management said shareholders often pay some expenses on behalf of Naviera and are in return compensated in shares. The cash injection was €12 million.

Naviera Armas experienced a reduction of passengers and freight of 75%-85% and 35%-40%, respectively, from March 15 to the end of April due to lockdown restrictions, it said. Out of its 38 operating vessels, 17 are currently in port.

The company said a €500,000 weekly subsidy has already been granted by the regional government of the Canaries from the beginning of April until the end of the normalization of the situation in exchange for maintaining all islands connected by ferry. Further subsidies are currently being negotiated with local, regional and national governments.

Naviera has implemented cost-cutting measures including laying off 650 employees. The figure is expected to reach 750 once the second temporary dismissals program is approved by the government. The company reported reductions of 68% of connections and 70% of miles sailed.

Savings are coming through other cost-cutting measures including the suspension of port taxes and other related costs. The company said it expects port taxes to be reduced by about 50% (annual port taxes amount to about €50 million) and a 100% tax exemption on vessels that are out of operation.

Naviera said it revised its target of scrubbers installed in the year to one to two, since the shipyards are currently closed as a consequence of Covid-19. It now said it expects to invest a total of €4.5 million to €12 million in scrubber installations in 2020 and that the investment will be 100% financed via operating leases, which the company is currently discussing with its main relationship banks. Two of the vessels have already been equipped with scrubbers, the group said.

As a consequence of the IMO 2020 regulation, Naviera has substituted its hedging positions of Brent for the first half of 2020 with gas oil as it is more correlated with the price of low sulfur oil. The company has also reduced the amount hedged for the period given the expected reduction in consumption. Additionally, it is re-negotiating its hedging agreements to reflect the decrease in fuel needs.

At the start of the year the group raised prices in the passenger and freight segment by 10% and 8% respectively. Other competitors have also increased prices. When asked if the group will reduce prices due to lower fuel costs, management said it will not as it has learnt from past price wars and was confident that competitors will not decrease prices as well.

Management said 80% to 90% of the total passengers were residents on some lines, who pay only 25% of the ticket price due to subsidies. Management said Naviera relied very little on tourists and vessel travel was the way of transport for locals. It added that in the last economic crisis Naviera did not see a decrease in the number of passengers but freight operations decreased a “little.”

FY’2019 Results

Naviera Armas’ 2019 recurring EBITDA pre-IFRS 16 dropped 29.3% year over year to €51.3 million mainly due to limited growth in revenue and a €30 million increase in other operating expenses. Reported EBITDA post-IFRS 16 amounted €71.9 million and includes IFRS 16 adjustment (€31.5 million), collective dismissal (negative €10.6 million), change in provisions (€400,000) and €600,000 of other gains and losses. Revenue rose 0.1% to €617.3 million.

The group reported a net leverage (net debt/PF EBITDA pre-IFRS 16) of 7.2x. Total cash available amounted to €40.9 million including a cash position of €18 million as of Dec. 31 and €22.9 million of undrawn RCF lines.

Operating cash flow dropped 46.9% year on year to €40.2 million.

The company implemented a collective dismissal process for a total 180 employees on March 31 (112 employees dismissed as of Dec. 2019).

In 2019, Naviera transported 5.2 million passengers, representing a 0.8% increase compared with 2018 mainly driven by an increase in the Balearic and Canary islands markets. In regards to freight, 8.3 million lane meters have been transported, representing a 1.8% increase compared to 2018 mainly driven by the Balearic (+4%) and Strait (+2%).

The updated capital structure of the group is below: