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  • Roger S. Conrad

Midstream and MLP Update

By Elliott H. Gue on Jul. 19, 2016

Capital Product Partners LP’s (NSDQ: CPLP) stock took a hard hit when the master limited partnership (MLP), which owns a fleet of refined-product tankers and other vessels, this spring announced an almost 70 percent cut to its quarterly distribution.

This painful decision stemmed from the MLP’s elevated cost of equity capital, near-term debt maturities and counterparty risk in its containership business. In particular, Hyundai Merchant Marine (Seoul: 01120) had fallen upon hard times and had pushed for price breaks on its long-term charters as part of a restructuring process.

When news of the distribution cut hit, we upgraded Capital Product Partners to a Buy from a Hold, as we regarded the resulting selloff as overdone and reasoned that the partnership would be able to maintain its new payout even if negotiations with Hyundai Merchant Marine and other counterparties went poorly.

Over the past few trading sessions, Capital Product Partners’ stock has surged by more than 20 percent. Investors who bought the MLP on the day that news of the distribution cut broke sit on gains of more than 40 percent.

What changed for Capital Product Partners?

Hyundai Merchant Marine last week inked an agreement to join the world’s largest alliance of container shippers, completing the last step in its plan to placate its creditors and avoid sinking into receivership.

This news alleviated investors’ concerns that a potential bankruptcy could result in steep cuts to the day-rates that the South Korea-based company pays to lease vessels from Capital Product Partners and other shipowners.

Hyundai Merchant Marine had chartered five of the partnership’s vessels—Hyundai Prestige, Hyundai Premium, Hyundai Paramount, Hyundai Privilege and Hyundai Platinum—under fixtures expiring in 2025.

Capital Product Partners this morning announced that the MLP had inked a restructuring agreement that applied a 20 percent haircut to the day-rates charged to Hyundai Merchant Marine over the next three years. At the end of the three years ended December 2019, the charter rates would revert back to the original daily rate of $29,350.

In exchange for the rate reduction, Capital Product Partners received shares in Hyundai Merchant Maritime and will make an unsecured loan to the South Korea-based shipper that will accrue interest at a rate of 3 percent per annum.

Although this agreement with Hyundai Merchant Marine will hit Capital Product Partners’ cash flow, the market had priced in a much steeper haircut, in part because of the magnitude of the distribution cut earlier this year.

Capital Product Partners will announce second-quarter results toward the end of July, at which point we’ll have better insight into how the partnership fared and management’s strategy now that Hyundai Merchant Marine has completed its restructuring.

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