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Rating Action:

MOODY'S DOWNGRADES NAVIGATOR GAS TRANSPORT FIRST PREFERRED SHIP MORTGAGE NOTES TO Caa1

30 Jul 1999
MOODY'S DOWNGRADES NAVIGATOR GAS TRANSPORT FIRST PREFERRED SHIP MORTGAGE NOTES TO Caa1 Moody's Investors Service lowered the rating of Navigator Gas Transport's (Navigator) first priority ship mortgage notes due 2007 to Caa1 from B1 and its second priority ship mortgage notes, due 2007, to Ca. The senior implied rating was reduced to B3 from the previous B1. The rating outlook is stable.


The downgrade reflects the reduced earnings capacity of the ships due to the lower freight rate environment than anticipated in the original business plan and the concurrent decline in the market value of the ships under construction, the collateral for the notes. The potential for significantly low freight rates places increasing reliance on the letter of credit structure to support debt service during start-up operations. These factors have increased the medium term risk of a default and significantly increased the risk of loss of principal in the event of default. While the ratings benefit from the structure of the transaction, including escrowed funds and a letter of credit that provide for interest payments to note holders, potentially for as long as two years, the underlying assumptions regarding freight rates and volumes of cargo available have changed significantly since the initiation of the transaction.


The rating reflects the increasing fragility of the company's financial structure. In Moody's opinion, the anticipated earnings capacity of the ships has been reduced to the point that bond holders have become heavily reliant on the letter of credit to support debt service and potentially some portion of operating expenses. Freight rates for industrial gases have declined as a result of several factors including reduced demand in emerging markets and a lower than anticipated scrapping rate for older vessels. While there may be some increase in demand in Asia if local economies continue to recover, it will not be sufficient, in Moody's opinion, to significantly increase freight rates globally.


Navigator issued $302 million in bonds ($217 million of first mortgage notes and $85 million of second mortgage notes) in order to finance the construction of five large (22 thousand cubic meters) petrochemical gas carriers. Escrowed funds provide for the payment of interest on the first priority notes during the construction period. Interest on the second priority notes is provided for by the issuance of additional notes. Once delivery of the first ship has been made, a letter of credit issued by Credit Suisse First Boston for up to $50 million is available to cover interest on the notes, as well as fees payable to the collateral agents, trustees, letter of credit issuing banks, etc. and to a limited extent ($4.5 million) operating expense shortfalls. Drawings under the letter of credit are secured by a super priority lien on the vessels effectively subordinating both the first and second mortgage notes.


Important to the ratings is the value of the ships as collateral. The secondary market value of ships is based on three factors, expected cash flow as reflected in anticipated freight rates over the life of the ship, the cost of building a new ship of similar capacity, and the ships' value as scrap. The total cost to Navigator of each vessel will be, Moody's estimates, more than $70 million of which approximately $61 million is financed by debt. A significant portion of this cost is as a result of the sophisticated cooling capacity allowing the ships to transport ethylene. In the current market, it is unknown whether buyers would apply full value to the ships' ability to carry ethylene. While Moody's believes the value of the collateral would be sufficient to cover a substantial amount, if not all, of the principal value of the first mortgage holders, the second mortgage notes would be substantially unprotected. Should the full $50 million be drawn under the letter of credit, the position of the second mortgage notes would be further impaired.


The company's business plan is to provide a liner-like trade capability for the movement of industrial gases. All five ships are required to provide the service envisioned by Navigator (three ships circling the globe and two crossing the Atlantic). This will allow the company to provide regular service to ports in Asia, the Middle East, Europe and the Americas. The large size, segregated tanks, and on board purging and cleaning systems make the ships some of the most sophisticated in the world and will allow them great flexibility in carrying multiple types and sizes of cargoes, in calling at a wide variety of ports, and in providing faster turnaround times in port. Delivery of the first ship is scheduled for September of 1999 with the fifth and final vessel due at the end of August 2000. During the delivery period Navigator will not have a sufficient number of vessels to execute its strategy of regular sailings and ports of call and, to date, the company has not identified employment. Other than spot charters, of individual ships prior to receiving the full compliment necessary to execute its envisioned trade routes and structure.


Moody's notes that the exchange of the original 144A note issue was delayed and, per the indenture, the company has paid an interest penalty of 0.5% p.a., depleting the escrowed interest reserve more rapidly than originally anticipated. The delay is partially due to meeting SEC plain language requirements and partially due to a change in auditors to a non-big five accounting firm.


The Caa1 rating of the first preferred ship mortgage notes, below the B3 senior implied rating, reflects the potential for subordination of the notes to drawings under the letter of credit and the value of the ships as collateral in the event of liquidation. The Ca rating of the second preferred ship mortgage notes reflects their contractual subordination to both the first priority ship mortgage notes and any outstandings under the supporting letter of credit.


Navigator Gas Transport PLC is an Isle of Mann public limited company.

No Related Data.
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