Capital Clean Energy Carriers Corp (CCEC) 2016 Q3 法說會逐字稿

Thank you for standing by and welcome to the Capital Product Partners conference call on the third-quarter 2016 financial results conference call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer and Chief Financial Officer of the Company.

(Operator Instructions)

I must advise you this conference is being recorded today.

The statements in today's conference call that are not historical facts including our expectations regarding developments in the market, the expected use of proceeds from the offering of our common units, fleet developments, our ability to pursue growth opportunities, our expected charter coverage ratio for 2015 and 2016 and expectations or objectives regarding our quarterly distributions and annual distribution guidance may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve risk and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated.

Unless required by law we expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

I would now like to hand over to your speaker today Mr. Kalogiratos. Please go ahead, sir.

Thank you, Kara, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation.

On October 20 our Board of Directors declared a cash distribution of $0.075 per common unit and $0.21375 per Class B unit for the third quarter of 2016. The third-quarter common unit cash distribution will be paid on November 14 to unitholders of record on November 7. The third-quarter Class B cash distribution will be paid on November 10 to Class B unitholders of record on November 3.

We are delighted to announce that our Board of Directors has approved an increase to our quarterly distribution by $0.005 to $0.08 per common unit from the fourth quarter of 2016 onwards on the back of an accretive acquisition that we completed earlier this month. The Partnership's net income for the third quarter stood at $11.8 million compared to $13.8 million in the third quarter of 2015.

In August 2016 we successfully sold approximately 4.4 million HMM common shares for an aggregate consideration of $29.7 million. We are pleased that following the successful liquidation of the HMM shares we were able to recover circa 80% of our total charter higher loss related to five of our containers following HMM's financial restructuring in July 2016.

Common unit coverage for the third quarter amounted to 1.5 times excluding the impact of the HMM proceeds and after accounting for the $14.6 million in capital reserves on the Class B unit distributions. On October 24 we used part of the HMM share sales process to fund the acquisition of an eco-type MR product tanker, the motor tanker Amor. The vessel was acquired from our sponsor Capital Maritime for a total consideration of $32.750 million (sic - see press release, "32.8 million") including approximately 284,000 common units issued to Capital Maritime at a price of $3.54 which represents a premium of 14% to Friday's closing price.

Furthermore, during the third quarter 2016 we secured one-year employment for two of our MR tankers, the motor tanker Atlantis and Alkiviadis. As a result of the new charters and the acquisition of the Amor, the remaining charter duration of our charters stood at 5.7 years as of the end of the quarter with approximate charter coverage of 97% for the fourth quarter of 2016 and 79% for 2017.

In September the Partnership launched an ATM at the market equity offering under which the Partnership may at any time and from time to time and for a period of up to three years offer and sell new common units having an aggregate offering amount of up to $50 million. We intend to execute the sale of units in a prudent manner and use the net proceeds from this offering for a general partnership purposes which may include, among other things, repaying or refinancing all or a portion of our outstanding debt and funding working capital, capital expenditures or the acquisition of new vessels. To date since the launching of the ATM on September 12 we have sold $2.3 million worth of units.

Turning to slide 3, revenues for the third quarter of 2016 were $60.3 million, an increase of 5% compared to $57.6 million during the third quarter of 2015. The increase was primarily a result of the increase in the size of the Partnership's fleet partly offset by approximately 102 days of off-hire that related to the dry docking of two of our Suezmaxes namely the Miltiadis M II and Amore Mio II.

Total expenses for the third quarter of 2016 were $42.4 million compared to $38.9 million in the third quarter of 2015. The $1.5 million increase observed in voyage expenses was primarily attributable to the expansion of our fleet as well as the increase in bankers consumption due to the ballast voyages of the two Suezmaxes that underwent special survey and the voyage charters of the MT Arionas which traded in the spot market until it commenced is special survey earlier this month.

Total vessel operating expenses during the third quarter of 2016 amounted to $19.1 million, an increase of 3% compared to the third quarter of 2015. The increase primarily reflects the expansion of our fleet. Total other expense net for the third quarter of 2016 amounted to $6.1 million compared to $4.9 million for the third quarter of 2015.

The increase primarily reflects higher interest costs incurred during the third quarter of this year mainly as a result of higher debt outstanding during the period compared to the same period in 2015. The Partnership's net income for the quarter was $11.8 million compared to $13.8 million in the third quarter of 2015.

Turning to slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure which is defined fully in our press release. We have generated approximately $31.7 million in cash from operations excluding the sale process of the HMM shares and before accounting for the Class B preferred units distributions and the capital reserve of $14.6 million. After adjusting for the reserve and the Class B unit distributions, the adjusted operating surplus amounted to $14.3 million excluding the impact of the HMM share sale proceeds which translates into a common unit coverage for the third quarter of 1.5 times.

On slide 5 you can see the details of our balance sheet. As of the end of the third quarter the partner's capital amounted to amounted to $923 million, a decrease of $15 million compared to $938 million as of year-end 2015. The decrease primarily reflects distributions declared and paid during the first nine months of 2016 of $56.1 million, partly offset by the net income of a nine-month period ended September 30 and the net proceeds from the issuance of common units under the ATM offering.

As of the end of the third quarter the Partnership's total debt increased by $22 million to $594 million compared to $572 million as of year-end 2015. The increase was due to a $35 million drawdown under our senior secured credit facility with ING Bank to fund the acquisition of the motor vessel CMA CGM Magdalena which was delivered in February 2016, partially offset by $13 million of scheduled loan principal payments under the same credit facility during the first nine months of 2016. Overall, our balance sheet remains strong with a net debt capitalization of 31% and with partners capital representing 58% of our total assets.

Moving to slide 6, we are pleased to have secured time charter employment for two of our MR tankers. The motor tanker Alkiviadis has extended its time charter employment with a French oil major Total for 12 months at $13,300 gross per day. The charter extension was agreed in early August with the earliest charter expiration in July 2017.

The vessel was previously earning a gross daily rate of $15,125 per day. In addition, the motor tanker Atlantas has been fixed on a time charter to Capital Maritime for 12 months at $13,000 gross per day.

The new charter commenced in October 2016. The vessel was previously employed under bareboat chartered to BP Shipping at the gross daily rate of $7,250.

We are pleased to see the continuous support from our sponsor in providing employment coverage at attractive rates at a time when the period market for product tankers remains relatively liquid. While CPLP's exposure to Capital Maritime as a charterer has been reduced with currently six vessels on charter to Capital Maritime out of a total of 36 vessels, Capital Maritime continues to be one of our important charterers and as a courtesy it has provided us with certain balance and information for the six months ended June 30 to help investors assess its financial profile. Capital Maritime is a diversified, profitable shipping company which owns six VLCCs, one Suezmax crude tanker, five MR product tankers, two handy bulk carriers and two feeder container vessels.

The average age of its fleet weighted by deadweight is approximately 4.6 years. It boasts of a strong balance sheet with a net debt to cap as of June 30 of around 14%, 1-4. And at the end of the first half of 2016, total assets amounted to $1.2 billion and stockholders' equity stood at approximately 67% of total assets.

In terms of newbuilding commitments Capital Maritime has on order two eco-Aframax crude tankers which have been fixed on a five-year charter and one remaining eco-MR product tanker on order. All newbuilds are expected to be delivered during the fourth quarter of 2016 and the first-quarter 2017. Capital Maritime intends to finance this newbuilding program with cash from its balance sheet and debt from commercial banks.

Now turning to slide 7, and taking into account the new charters the average remaining charter duration is 5.7 years. We have seven product tankers, three Suezmax tankers, and two containers whose charters come up for renewal over the next 12 months assuming that their respective charters do not exercise optional periods.

Moving on to slide 8, we review the product tanker market developments in the third quarter. MR product tanker spot rates remain under pressure during this quarter as high inventories across all major refined products, lack of arbitrage opportunities and refinery outages in the US and Europe had a negative impact on ton mile demand for product tankers.

According to the IEA, OECD total inventories stood at a record level of 3 billion barrels in July 2016, limiting petroleum products shipper movements. At the same time, the MR product tanker fleet has expanded at a relatively high pace with net fleet growth at 6% year on year as at the end of the quarter adding pressure on the market. On the bright side, strong US gasoline demand and surging Chinese exports partly offset weakness in the market.

In addition, US product exports remain at elevated levels with exports averaging 4.1 million barrels in the third quarter when compared to 3.7 million barrels in the previous quarter. The product tanker period market saw in general less activity and shorter rates as the weaker spot market affected charterers' appetite for period deals. Despite the current weakness in the markets demand and supply dynamics are gradually improving.

New contracting activity has been very limited and overall 2016 is on pace to see record low ordering with only five new MR orders recorded year to date. The negative sentiment prevailing in other shipping sectors such as in the drybulk and offshore markets as well as the limited access to capital for the industry as a whole has severely limited the ability of owners to pursue newbuilding orders.

Importantly, the rationalization of the ship building industry continues with several shipyards either closing or cutting down capacity to the dearth of new orders. For example, we count currently only one major shipyard in Korea willing to take orders for newbuild MR product tankers compared to five shipyards a couple of years ago. As a result, the MR order book has now decreased to 10.7% as a percentage of the fleet, the lowest since 2000 while slippage remains high as approximately 27% of the expected newbuilds were not delivered on schedule.

Finally, on the demand side, structural reforms in China's refining sector and refinery capacity expansion east of Suez are expected to positively affect product tanker trade. And, as a result, analysts expect to see product tanker deadweight demand to continue to grow by between 3% to 5% over the coming years.

Moving to slide 9, the Suezmax crude tanker market was overall weaker in the third quarter of 2016 compared to the previous quarter. The decline was partly attributed to seasonally weaker demand for crude oil as well as to the declaration of force majeure at a number of Nigerian export terminals as a result of militant attacks on oil facilities. This led to a significant decline in the volume of cargoes available for Suezmaxes in the West African market, particularly in the first two months of the quarter.

In addition to the weaker demand, increased crude tanker deliveries have exerted downward pressure on rates during the quarter as 20 Suezmax deliveries have been reported in the first nine months of this year compared to 10 in the same period of 2015. On the positive side, the spot market rebounded from mid-September onwards on the back of higher exports from Russia and Nigeria as the militant groups ceased hostilities and entered into negotiations with the Nigerian government, thus resulting in higher oil production and subsequently crude exports.

The Suezmax market was all supported by solid Chinese crude imports and robust crude flows from Iran. Chinese crude imports reached a new record high of 8.1 million barrels in September, up 18% year on year.

In the period market we saw limited demand for Suezmax tankers during the quarter while period rates retreated in line with the softer spot market. According to the IEA world oil demand is expected to increase by 1.2 million barrels in both 2016 and 2017.

Overall industry analysts expect Suezmax tanker deadweight demand to expand by 1.5% for this year. This is largely on the back of firm growth of Chinese crude imports and the reemergence of Iranian crude exports to Europe, partly offset by lower exports from West Africa as a result of the force majeure declared in Nigeria earlier in the year.

Looking at the supply side, the Suezmax tanker order book through 2019 corresponds to 19.4% of the current fleet as compared to 22% at the end of the previous quarter. Contracting activity has declined sharply with just 11 Suezmaxes ordered year to date, a sharp contrast to the 59 vessels in full-year 2015.

Turning to slide 10, we are delighted that our Board approved the increase of our distribution by $0.005 from the fourth quarter onwards. This is as a result of the accretive acquisition of an MR product tanker we concluded last week. In particular, we acquired the motor tanker Amor from our sponsor Capital Maritime for a total consideration of $32.750 million.

The vessel is on a time charter with Cargill International at a rate of $17,500 and is expected to expire in October 2017. The consideration was funded with $16 million from the cash proceeds of the HMM shares and the resumption of $15.8 million of debt under a term loan of a new credit facility with ING Bank.

The term loan is non-amortizing for a period of two years from the anniversary of the dropdown with an expected final maturity date in November 2022. The interest margin on that the term loan is 2.5%.

The remainder of the consideration was funded with issuance of approximately 284,000 units to Capital Maritime at a price of $3.54 which was the volume weighted average unit price for the period from July 14 to October represents a premium of 14% to Friday's closing price. As we pursue more accretive acquisitions going forward always subject to market conditions and opportunities we expect our Board to revisit the Partnership's distribution guidance.

Moving to slide 11, as mentioned in past quarterly calls the partnership has access to a number of assets that could be potential dropdown candidates. We continue to hold the right of first refusal on five eco-IMO product tankers which are currently controlled by our sponsor. Four of these vessels are financed under the same ING credit facility with the Amor which allows us to (inaudible) the respective tranche for each vessel at the 50% advance ratio provided the vessel has one year of employment or longer and provides for a two-year non-amortizing period. Moreover, the Partnership has access to a number of crude tanker opportunities from our sponsor including two Aframaxes with a five-year charter to a US oil company.

Capital Maritime is in the process of arranging a credit facility for these vessels which is expect to provide for the financing of these vessels with both Capital Maritime and CPLP. We expect to continue to seek accretive acquisitions from our sponsor and from third parties subject to the accretion to the distribution and to conference committee approval on the terms of the transaction.

Finally, turning to slide 12 we are pleased to have achieved a number of important milestones for the partnership during the last few months. First, we concluded our negotiations with HMM and we successfully liquidated the equity compensation received from HMM by recovering approximately 80% of our total charter hire loss. Second, we agreed to acquire a modern eco Amor product tanker from Capital Maritime with an attractive charter to Cargill. We have funded part of the acquisition cost with the proceeds from the sale of the HMM equity compensation.

It is also worth highlighting that our sponsor Capital Maritime has received units as part of the purchase price at a significant premium to the latest closing price of our common units. Additionally, we launched an ATM offering with the aim of raising further capital over a period of time for vessel acquisitions and general corporate purposes.

Regarding recent market developments we know that the demand fundamentals for tankers and especially product tankers remain solid on the back of refinery capacity relocation, increased ton miles and the low oil price environment. However, the high oil product inventories and the increased supply of tanker vessels has recently weighed on vessel earnings. The limited number of new tanker ordering thus far this year and the rationalization of [excess seabuild] capacity combined with solid industry fundamentals are positive trends for the tanker market in the medium to long run.

Finally, we are delighted that with the expected expansion of our fleet our Board of Directors has approved the increase of our quarterly distribution from the fourth-quarter 2016 onwards to $0.08 per common unit. Depending on our access to the financial markets our objective is to pursue additional accretive transactions going forward and expand our asset base with a view to further increasing the long-term distributable cash flow of the partnership.

And with that I am happy to answer any questions you may have.

(Operator Instructions) Michael Webber, Wells Fargo.

Good morning, Jerry. How are you?

Hi, Mike. Very well. Yourself?

Just a couple of questions. First, I guess, around the drop and then how you think about your long-term refinancing needs. And, I guess, they are interrelated, but maybe actually starting with the debt, you've got a relatively heavy 2018 and 2019 amortization schedule and that along with HMM was the precursor to the recent distribution cut.

You guys have restarted that dropdown program here. So I guess my questions are twofold. One, how do you think about the timeline for addressing that 2018 and 2019 refi risk and then two, if and when you can get that rolled how you think about the current distribution path that you look at the current path being a temporary lower run rate pre-refi or do you look at this as the new normal and everything from here on out will be based off of this level regardless of what you are able to do with your debt?

Sure. With regard to the refinancing plans, we do enjoy an excellent relationship with our banks. And from preliminary discussions we have had we understand that they would be interested in participating in a potential refinancing after having repaid or prepaid depending on the timing a portion of our existing debt in line with the sums we are putting aside as a reserve.

You recall that we have set aside this $14.6 million each quarter until the end of 2018 or just sort of $60 million per year. So we are going to maintain that, this reserve, until we find a proper solution.

Now one thing to bear in mind is that certain of our facilities expire from 2019 onwards, apart from one that expires in the first quarter of 2018 and it's really a very small part of our debt. We have to make sure that when we refinance we also give adequate visibility in terms of the maturities compared to what we have today.

So we wouldn't want to rush into refinancing so that we just lock in maturities in 2021 when most of our maturities are in 2019 at this point. So what I am trying to say is that we are having these discussions and we have to find the optimal point in time to enter into this refinancing transaction.

Secondly, with regard to your question as far as the distribution is concerned, I think the message that we gave back in April is that going forward any distribution level will be based, that we choose will be based after we reserve for debt repayments. So in a way the distribution level that we have today is based on our capital reserve which is based on the debt repayments that might be a bit on the heavy side compared to a more normalized repayment schedule, if we do manage to refinance and achieve a better repayment schedule, then part of that accretion could find its way back into the distribution.

Got you. That makes sense.

When I look at this it seems like just based on the current reserve you will have north of $175 million through the end of 2018, which would take care of the Amor through that period. 2019 is, obviously, a bit lumpier.

So I guess part of that, part of the answer to that question is, and I guess part of the real question there is how early can you realistically get traction with your banks to look at 2019, which seems to be the big variable, you've got the cash that can satiate everything this year and next year without much of an issue? But is this something way you need to get within six to nine months of that period before you can really sit down and move that figure around or is that something you guys think you can realistically address today with your lenders?

Well, discussions I said our ongoing and we have to balance that decision with the fact that we don't want to be too early when it comes to refinancing, so to make sure that we give adequate visibility. So we will continue our discussions over the coming quarters and hopefully also as our cash balances are better we can find a solution. We wouldn't wait until 2019, but I don't think it will happen next quarter either --

Right. But it's not a situation where you could do it today and just haven't chosen to. There's a window within it becomes realistic and that's probably next year?

Yes, I think it will be 2017. The discussions will definitely continue 2017, but you wouldn't want us to do it today either. I mean if we did it today and we did a five- to seven-year let's say facility, that wouldn't take us in terms of maturity very far from where we are today.

Right, yes. I think that unitholders, and they were receiving a higher distribution, would probably argue with that. But I certainly get the idea that there's a frictional point at which you can't, it doesn't really do much good to address it today or they might not be willing to really give you the terms you want this far out, which is where I was going with that.

But I guess two more quick ones, then I will turn it over. Actually very quick ones.

You guys, you have liquidated the HMM stake. You've got one more containership it looks like on the dropdown candidates, a smaller I think 2,000 TEU containership with STX.

From a viability, actually I don't know if that's delivered, from a viability standpoint going forward, obviously, the tankers make up a bigger, the majority of that dropdown pipeline. Do you think container ships remain a viable option for you guys down the line outside of what's in the existing pipeline just given what's happened with HMM and I guess more severely with Hanjin? And luckily you guys didn't have exposure there. But is that still within the long-term mix of what you guys would look to?

When it comes to the dropdown opportunities, the immediate dropdown opportunities if I refer you back to the relevant slide in the presentation as you say it's dominated by tankers. And some of them you know very well like the MR product tankers we'll have a right of first refusal. There are also certain crude assets and two of them we have also communicated previously that have a five-year charter.

And in addition to that as I discussed earlier, some of these tanker assets, they also have debt in place which can be novated in a way to Capital Product Partners. So really if you have the asset, if you have the charter coverage and you have the debt it's a question more of where the equity comes from. And we still have certain proceeds from the sale of the HMM shares left and we still and we have some incremental proceeds from the ATM, so we will look at I think that will be the easier transactions to look at in the near future.

But in general terms, accretion remains the criterion. So if, again, this is a theoretical question, but would we look at a container that is let's say fixed to a first-class liner like a Maersk or CMA or the other big guys if it was an accretive transaction and provided cash flow visibility? Yes, of course we would look at it.

I think it's more we're a bit agnostic with regard to, as you know, to asset classes. And especially today if you were to buy at current market levels there is limited downside.

Got you. That makes sense. One more for me and I will turn it over.

And I think I've asked about this in the past, but within your all's fee structure there are a couple crude carriers that have S&P fees attached to them, I believe they are legacy assets that came over from the Crude Carriers acquisition. Those have not -- those kind of fees have not been part of your all's ongoing operating structure by any stretch, but they are attached to a couple of legacy assets. Is that something that you guys would look at removing or is there a fundamental or a strategic reason why those are still in place?

As you correctly pointed out, these are legacy assets. We took over the management agreement when the Company merged with Crude Carriers.

But I think to your analysis it is actually a good question because it's an opportunity to point out, and I think that's something that most of you that you have been following CPLP for some time know quite well, that Capital Maritime as a sponsor has been very supportive of CPLP in more than one way. Firstly, it has participated I think in all but one equity offerings. The current acquisition of the Amor I think if anything demonstrates that the sponsor has acquired units at a premium not just this time but also in the past as you might recall, I'm happy to go over the details.

And secondly in times of when the period market has been illiquid, you recall maybe in 2012, 2013 that the tanker market was very weak. Charters were very reluctant to take period charters. Capital Maritime stepped in and took vessels on charter providing cash flow visibility to investors. I think all these are very important considerations when it comes to the sponsor support.

Now as you say there are these three assets that are legacy assets out of 36 ships. We haven't really thought about this. It's good that you point it out, but I think you also have to look at the broader picture.

And do not forget that to another point that you have raised, you have discussed the reset of the IDR of incentive distribution rights which took place a couple of years ago. I would like to remind you that this was a decision approved by the AGM without the participation of Capital Maritime, so really this was not a decision of Capital Maritime or CPLP behind closed doors. And more importantly there was also a value transfer, so Capital Maritime agreed to waive more than $30 million of value in terms of acquisitions in order for this IDR is said to be approved by the unitholders.

So I think these are all important points when it comes to governance. And in general I do not think that the fact that three of our vessels have legacy management fees is something that should distort the broader picture.

Right. But back to that initial question, is that specific angle on the C structures, there is a possibility you guys could look to revisit that at any point? Or is that not necessarily on the Board's agenda at any point?

We have not discussed this recently but it's good that you raise it. We will have a look at it again. But it will be also good for the positive sides of our relationship with the sponsor to be highlighted, as well.

Absolutely. All right, guys, thanks for the time.

Jon Chappell, Evercore.

Thank you. Good afternoon, Jerry. Just a couple of questions, much quicker than the last.

First, on the dropdown capabilities, just two parts to this one. First of all, you used $16 million of cash in the HMM sales to finance the Amor. That leaves you about $13 million left there, and then if we think about the potential to get the ATM done that would probably be $38 million total.

Is that the kind of excess cash liquidity you are thinking about for the equity components of dropdowns? Or would you really need the equity capital markets to open up again for a true offering before you can take down any more assets?

That's actually the way that we think about it. As you say we do have about a bit less than $14 million of proceeds left from HMM. There is also the ATM, and subject to raising some incremental equity we could look at certain transactions.

I think it's worth noting that our ATM filing for up to $50 million is valid for three years and allows us to sell incremental common units in the market. But it will be done as we deem appropriate and within certain parameters with regard to volume and price. In the end, our ability, for example, to conclude accretive acquisitions will be one of the major criteria for using the ATM and as you have noted we have so far made very limited use of it.

So we have issued approximately 674,000 units bringing in about $2.3 million in net proceeds. As we have access to certain assets from the sponsor or, of course, from the second market, that secondhand market that arises, we will combine some of the liquidity from the ATM together with the HMM proceeds, the debt as we discussed for certain of these tankers is in place and we can put together a transaction.

Okay. And then just on the optional vessels with the right of first refusal, am I reading it correctly that only the Aframaxes, which obviously are not under right of first refusal, but only the Aframaxes have long-term contracts attached and the MRs that are under the right of first refusal none of them have any employment even for 12 months at this time?

That is correct. Capital Maritime is trading the MRs in the spot market and the two Aframaxes have a five-year charter.

Okay. So then as it relates to both those, which I guess will be Capital Maritime's decision, but then your existing fleet, obviously as an MLP structure and the importance of your distribution it's important to have cash flow visibility.

But you do have several product tankers coming off charter in the very near term. And despite the very favorable outlook that you just laid out, which we agree with, it seems like the charter market is somewhat artificially depressed. So would you consider operating those on shorter-term voyages whether it's a spot market or three- to six-month charters to bridge the gap before the charter market more appropriately represents the supply-demand outlook?

Well I guess the shorter we will go will be around the 12-month period. In a way, if you start coming off from that duration it will be increasingly more difficult for people to have an adequate cash flow visibility, which is as well as for us when it comes to the distribution. But because we have this view that we expect things to improve in the medium to long term, I think you will find that like we have done back in 2012, 2014 we will tend to fix more often for a year than not as we expect a better market ahead.

Okay. And that would hold true for the crude tankers in the container ships, as well?

Yes, that is correct, that is correct. You have, we have recently fixed the Suezmaxes for a year and in any case, to be frank, the longer than a year demand for charters is fairly limited at this point.

When the market changes in this way and charters have access to cheaper ships from the spot market, they tend to take a step back. And don't forget, many of these charters they also have existing exposure from more expensive charters that they want to see a re-delivered before they look at getting in new ships. So in any case, I would say that the 12- to 18-months kind of charter durations are the more liquid at this point.

Understood. Thanks, Jerry.

Spiro Dounis.

Hey, Jerry, how are you?

Hi, Spiro. Very well. Yourself?

Good, good. It's another day in paradise. Just wanted to ask about, following up on that last comment in question on the two container vessels coming off charter I guess later on in 2017, I believe there is a renewal rate in there that is a bit of a step up from the current rate. And I guess I'm just wondering, I don't think it was ever disclosed, could you give us a sense of where that renewal rate is relative to the current market just so we can get a sense of the likelihood that maybe the option gets extended?

Unfortunately, I think it is unlikely that charterers will exercise that option. The option was a $20,000, well, it still is a $20,000 per day. But as you know the container market also for post-panamaxes while it showed some signs of improvement during the previous couple of quarters it has come off on the back of the Hanjin bankruptcy.

This is really because the Hanjin bankruptcy meant that the number of additional vessels were re-delivered to owners and the idle fleet jumped from 5% to 7%. In addition, a lot of these vessels were post-panamaxes which in a way offset the beneficial impact of the new Panama Canal locks which really enhanced demand for post-panamax vessels in the previous couple of quarters. Well, I say post-panamax, now they are called neo-panamax.

So I think it is unlikely that the charterers' PIL exercise that option. But, of course, we have a few months to go.

But if I made there is one important highlight that I have to make with regard to the Hanjin bankruptcy. The overall we do not have any exposure to Hanjin and that's important to highlight but for us in a way it is good news. It is good news because except for the impact that it has on the charter market or at least in the short term, it has enhanced the position of HMM.

And this has taken place in two ways. Firstly, Hanjin bankruptcy has increased the cargo volume for HMM as well as it increased their access to quality post-panamax tonnage that could help lift their operating margin and profitability.

Finally, don't forget that I think the Korean government and the Korean establishment in a way having seen the adverse effects of the Hanjin bankruptcy, which I think were greater than people expected, will make sure that HMM is properly supported going forward as they very much want to have a national mainline operator. So, all in all, the Hanjin bankruptcy while it has I think negatively affected at least in the short term the charter market for us, it's good news as it means that our HMM exposure has less risk than previously considered.

Yes, that's a good point. Then just I want to follow up on the dropdown and I guess the distribution increase.

Trying to get a sense for how much this drop maybe is a blueprint for future ones in terms of how much you are able to raise a distribution. And I guess what I'm wondering is was the $0.005 increase pretty much all a result of the accretion of this drop without cutting into the coverage ratio and then how much was held back in this respect for amortization?

Even though this is a non-amortizing loan I think you said before that we should expect future drops to maybe have some holdback in there. Just trying to get a sense of how accretive this drop was?

Well, the idea as I said earlier will be to pay out the full accretion of any dropdown after reserving for debt repayments. So in a way you should see the communicated distribution increase from next quarter onwards as the expected accretion of the dropdown after debt repayments.

And in general terms that is going to be the policy going ahead, of course, subject to the length of the charter and the long-term prospects of the partnership. We will tend to revisit distribution in line with a dropdown accretion of future transactions.

Great, that's it for me. Thanks, Jerry.

Ben Brownlow.

Thanks for taking the question. Most of my questions have been answered but on bank financing for dropdowns, how much commitment as a percentage of asset value should we think about that going forward? Is that 50% loan to value financing appropriate way to think about it, and then on the term loan can you just touch on the covenants there?

Let me start with the second question. The covenants of the term loan are identical to the ones that we have for our existing loan agreements. So 72.5% LTV test, 2 to 1 EBITDA to net interest expense cover ratio and $0.5 million per vessel minimum liquidity.

But overall when it comes to the advanced ratio of let's say future acquisitions when it comes to the MRs and the rest of the all but one of the remaining MRs are currently financed by the same facility that we used to acquire the Amor. So we can novate tranches. That will be at a 50/50 debt equity ratio.

When it comes to potentially, for example, the Aframaxes or the VLCCs, there we potentially could look at the higher advance ratio. And given the fact that our overall leverage is below 50% and there is amortization to this new credit facilities we could potentially go a little higher than 50/50 debt equity ratio, but let's say within the realm of 50% to 60%. But you shouldn't expect anything higher than that.

Great, thank you. And on the HMM proceeds, just from an accounting standpoint the near $30 million in deferred I guess revenue, will that be through the time charter period of 2019 when the day rates adjust? Or is that through the end of the time charter period of 2025?

It's going to be until the end of its time charter.

Great, thank you.

Mike Gyure, Janney.

Yes, good morning. Thanks. Can you guys talk a little bit about the dry dock schedule for maybe the next two quarters and what's going on there?

Sure. That's actually a good question because in this quarter, as I mentioned earlier, we had 102 off-hire days relating to the dry docking of the Miltiadis M II and the Amore Mio II. These are Suezmaxes and as a result they weighed on revenues so that you can understand the loss of revenues because of this off-hire was around $3.1 million.

If you add to that an additional $0.6 million that these vessels incurred in bankers under voyage expenses this was quite an impact for the third quarter. But going forward in the fourth quarter of 2016 we will only have one vessel dry docking. That's the motor tanker Arionas, that's a smaller ship 37,000 tonner.

So you should expect an off-hire of about 25 days. And, of course, its contribution to revenues is much smaller. And, importantly, we have no dry dockings in 2017.

So we are 2015 and 2016 were heavy years when it comes to special surveys. But we have none into next year.

Great, thank you very much.

There are currently no further questions. Please continue.

With that I would like to thank you all for dialing in today.

Ladies and gentlemen, that does conclude today's conference. Thank you for participating. You may all disconnect.