Description

VIC has become a forum for the tanker market thanks to bowd and hkup. Firstly, I admit “I’m not worthy” on relative knowledge base but regardless, might as well wade into the shark-infested waters

So far, VIC has largely focused on tanker equities and there are many reasons why this is the case (bank debt is clubby + very few non-convertible ways to play). NNA 8.125% note provides downside protection and equity-like upside

Stating the facts, tanker equities are high vol and require a stomach of steel that hkup and bowd clearly have. And separately, I directionally agree that the equities will be large winners if you can stomach the +/- 10% daily moves. Issue for most is 1) hyper vol and 2) global uncertainty around the space = unless you put in a locked box for the next 12 – 24 months and don’t stare at it, will you truly be able to monetize the trade to a more normalized and / or overshoot value (side-note, I also own a basket of equities in small size)

As an alternative, NNA 8.125% notes due Nov 2021 offer downside protection with equity like upside (~40% YTM) with a short fuse / hammer as these notes are likely addressed in next 12-months if not sooner. Additionally, the shorter maturity overlaps nicely with this super-normal earnings cycle and the Q1 - Q4 puff of FCF will allow NNA to buy back a significant chunk of their debt and extend the runway

Also like the credit angle as the governance on tanker equities is scary, at least NNA has sacred rights (coupon and maturity, pay me). And tanker equities so far have been laser-focused on paying down debt (less focused to date on rewarding equity holders with share buybacks/dividends, but I admit Torm is an interesting play). Quick snapshot on NNA below:

NNA owns ~13 VLCCs, 8 LR1, 18 MR2 and 2 chemical tankers (average age of ~8.1 years). Calculating the fleet value (age-adjusted), I get to a figure that’s north of ~1.5Bln. As noted below, there’s under ~$1.1Bln of net debt and the “create” is inside of $900MM at current price of ~65 cents. The 8.125% note pays a ~12.5% CY, and offers a >100% return to 6-month-takeout and >55% to 1-year (closer to ~40% on YTM basis). At current prices, create the biz for less than ~55 cents of age-adjusted fleet value. Factoring in FCF generation over 2020, the “create” is implies something closer to ~40 cents of age-adjusted fleet value, very inexpensive

More importantly, there are a couple options for NNA to address the $657MM of 2021 debt: 1) FCF generation will likely conservatively exceed >$200MM in 2020, 2) my guess (more clarity in 2-weeks when they report) is that the company is opportunistically buying back debt so let’s assume the ~200MM of FCF is helpful in taking out an additional ~50MM? (i.e. 80 cents average price) of value, 3) additional sale leasebacks are possible (my sense is ~$50MM), 4) additional bank capacity on fleet that matures in 2020 likely unlocks an additional ~$50 – 100MM, 5) Europe2 JV likely has an additional $50MM of value that can be financed from this, 6) lastly, push comes to shove, if the cycle lasts longer, perhaps 2021 also helps provide a FCF tailwind, 7) and small peanuts, but the company can re-direct the ~$20MM dividend payout from equity to help complete a refinancing. Upshot is that the actions above likely total >$400 - $450MM in 2020, which shrinks the need down to less than $250MM

Catalyst

Q1 earnings in next few weeks, dislosure on note repurchases

Additional disclosure on addressing the balance sheet