F-1/A 1 d776617df1a.htm AMENDMENT NO.5 TO FORM F-1 Amendment No.5 to Form F-1
Table of Contents

As submitted with the Securities and Exchange Commission on November 10, 2014.

Registration Statement No. 333-199235

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Navios Maritime Midstream Partners L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Republic of the Marshall

Islands

  4412   N/A

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

7 Avenue de Grande Bretagne, Office 11B2

Monte Carlo, MC 98000 Monaco

(011) + (377) 9798-2140

(Address and telephone number of Registrant’s principal executive offices)

 

 

CT Corporation System

111 8th Avenue

New York, New York 10011

(212) 894-8800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Stuart H. Gelfond, Esq.

Joshua Wechsler, Esq.

Fried, Frank, Harris, Shriver & Jacobson LLP

One New York Plaza

New York, New York 10004

(212) 859-8000 (telephone number)

(212) 859-4000 (facsimile number)

 

Sean T. Wheeler

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400 (telephone number)

(713) 546-5401 (facsimile number)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

 

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common units representing limited partner interests

  $195,615,000   $22,731

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
(3) Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion,

Preliminary Prospectus dated November 10, 2014

PROSPECTUS

 

LOGO

Navios Maritime Midstream Partners L.P.

8,100,000 Common Units

Representing Limited Partner Interests

 

 

We are a Marshall Islands limited partnership recently formed by Navios Maritime Acquisition Corporation (“Navios Maritime Acquisition”). This is the initial public offering of our common units. We anticipate that the initial public offering price of our common units will be between $19.00 and $21.00 per common unit.

Although we are organized as a partnership, we have elected to be treated as a corporation solely for U.S. federal income tax purposes. Currently, no public market exists for the common units. The common units have been cleared for listing on the New York Stock Exchange under the symbol “NAP.”

 

 

We are an “emerging growth company”, and we are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.” Investing in our common units involves risks that are described in the ‘‘Risk Factors’’ section beginning on page 20 of this prospectus.

These risks include the following:

 

    We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution on our common units following the establishment of cash reserves and payment of fees and expenses.

 

    Our initial fleet consists of only four vessels. Any limitation on the availability or operation of those vessels could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

    We are focused on employing vessels on long-term charters of at least five years, which may not be typical for the crude oil, refined petroleum product, chemical and liquefied petroleum gas sectors of the seaborne transportation industry.

 

    We depend on two customers for our revenue. Charterers may terminate or default on their obligations to us, which could materially adversely affect our results of operations and cash flow, and breaches of the charters may be difficult to enforce.

 

    Charter rates in the crude oil, product and chemical tanker sectors of the seaborne transportation industry in which we operate have significantly declined from historically high levels in 2008 and may remain depressed or decline further in the future, which may adversely affect our earnings.

 

    We must make substantial capital expenditures to maintain and expand our fleet, which will reduce our cash available for distribution.

 

    Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.

 

    We depend on Navios Maritime Holdings Inc. (“Navios Maritime Holdings”), Navios Maritime Acquisition Corporation (“Navios Maritime Acquisition”) and their affiliates to assist us in operating and expanding our business.

 

    Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners L.P. and their respective affiliates may compete with us.

 

    Unitholders have limited voting rights and our partnership agreement restricts the voting rights of unitholders owning more than 4.9% of our common units.

 

    Our general partner and its affiliates, including Navios Maritime Acquisition, own a significant interest in us and have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor their own interests to your detriment.

 

    Fees and cost reimbursements, which our manager will determine for services provided to us, will be significant, will be payable regardless of profitability and will reduce our cash available for distribution.

 

    Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner, and even if public unitholders are dissatisfied, they will be unable to remove our general partner without Navios Maritime Acquisition’s consent, unless Navios Maritime Acquisition’s ownership share in us is decreased.

 

    You will experience immediate and substantial dilution of $8.62 per common unit.

 

    Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

 

 

 

     Per
Common Unit
     Total  

Public offering price

   $         $     

Underwriting discount

   $         $     

Proceeds, before expenses, to us

   $         $     

The underwriters may also exercise their option to purchase up to an additional 1,215,000 common units from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The common units will be ready for delivery on or about                     , 2014.

 

 

Joint Book-Running Managers

 

 

BofA Merrill Lynch   Citigroup   J.P. Morgan
Credit Suisse    

Wells Fargo Securities

 

 

Senior Manager

 

Deutsche Bank Securities

 

 

Co-Manager

S. Goldman Advisors LLC

 

 

The date of this prospectus is                     , 2014.


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LOGO

 

 

LOGO

 

LOGO

 


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You should rely only on the information contained in this prospectus and any free writing prospectus we prepare or authorize. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 

TABLE OF CONTENTS

 

SUMMARY

     1   

Navios Maritime Midstream Partners L.P.

     1   

Our Relationships with Navios Maritime Holdings and Navios Maritime Acquisition

     4   

Business Opportunities

     4   

Competitive Strengths

     5   

Business Strategies

     6   

Risk Factors

     7   

Implications of Being an Emerging Growth Company

     8   

Formation Transactions

     9   

Organizational Structure After the Transactions

     11   

Principal Executive Offices and Internet Address; SEC Filing Requirements

     11   

Summary of Conflicts of Interest and Fiduciary Duties

     12   

The Offering

     13   

Summary Selected Historical and Pro Forma Combined Financial and Operating Data

     18   

RISK FACTORS

     20   

Risk Inherent in Our Business

     20   

Risks Inherent in an Investment in Us

     50   

Tax Risks

     59   

FORWARD-LOOKING STATEMENTS

     62   

USE OF PROCEEDS

     64   

CAPITALIZATION

     65   

DILUTION

     67   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     69   

General

     69   

Forecasted Results of Operations for the Twelve Months Ending September 30, 2015

     71   

Forecast Assumptions and Considerations

     73   

Forecasted Cash Available for Distribution

     77   

HOW WE MAKE CASH DISTRIBUTIONS

     80   

Distributions of Available Cash

     80   

Operating Surplus and Capital Surplus

     80   

Subordination Period

     83   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     85   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     85   

Incentive Distribution Rights

     85   

Percentage Allocations of Available Cash From Operating Surplus

     87   

Distributions From Capital Surplus

     87   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     88   

Distributions of Cash Upon Liquidation

     88   

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

     90   

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     92   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     103   

Business Overview

     103   

Expenses

     106   

Trends and Factors Affecting Our Future Results of Operations

     106   

Period over Period Comparisons

     107   

Liquidity and Capital Resources and Uses

     111   

Off-Balance Sheet Arrangements

     115   

Contractual Obligations and Contingencies

     115   

Reduced Emerging Growth Company Requirements

     115   

Critical Accounting Policies

     116   

Quantitative and Qualitative Disclosures about Market Risks

     119   

THE INTERNATIONAL OIL TANKER SHIPPING INDUSTRY

     121   

Crude Tanker Fleet Overview

     129   

VLCC Fleet Development

     132   

Tanker Freight Rates

     137   

Secondhand Prices

     140   

BUSINESS

     142   

Overview

     142   

Our Relationships with Navios Maritime Holdings and Navios Maritime Acquisition

     142   

Business Opportunities

     142   

Competitive Strengths

     143   

Business Strategies

     144   

Our Initial Fleet

     145   

Option Vessels

     146   

Our Customers

     147   

Competition

     147   

Time Charters

     147   

Management of Ship Operations, Administration and Safety

     148   

Oil Company Tanker Vetting Process

     149   

Crewing and Staff

     149   

Risk of Loss and Liability Insurance

     149   

Governmental and Other Regulations

     150   

Facilities

     158   

Legal Proceedings

     158   

Taxation of the Partnership

     158   

MANAGEMENT

     163   

Management of Navios Maritime Midstream Partners L.P.

     163   

Directors and Senior Management

     165   

Reimbursement of Expenses of Our General Partner

     167   

Executive Compensation

     167   

Compensation of Directors

     167   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     168   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     169   

Distributions and Payments to our General Partner and Its Affiliates

     169   

Agreements Governing the Transactions

     170   

Other Related Party Transactions

     177   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     179   

Conflicts of Interest

     179   

Fiduciary Duties

     182   

 

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DESCRIPTION OF THE COMMON UNITS

     186   

The Units

     186   

Transfer Agent and Registrar

     186   

Transfer of Common Units

     186   

THE PARTNERSHIP AGREEMENT

     188   

Organization and Duration

     188   

Purpose

     188   

Power of Attorney

     188   

Capital Contributions

     188   

Voting Rights

     188   

Limited Liability

     191   

Issuance of Additional Securities

     192   

Tax Status

     192   

Amendment of the Partnership Agreement

     192   

Action Relating to the Operating Subsidiary

     194   

Merger, Sale, or Other Disposition of Assets

     194   

Termination and Dissolution

     195   

Liquidation and Distribution of Proceeds

     195   

Withdrawal or Removal of our General Partner

     195   

Transfer of General Partner Interest

     197   

Transfer of Ownership Interests in General Partner

     197   

Transfer of Incentive Distribution Rights

     197   

Change of Management Provisions

     197   

Limited Call Right

     198   

Board of Directors

     198   

Meetings; Voting

     199   

Status as Limited Partner or Assignee

     200   

Indemnification

     200   

Reimbursement of Expenses

     200   

Books and Reports

     201   

Right to Inspect Our Books and Records

     201   

Registration Rights

     201   

UNITS ELIGIBLE FOR FUTURE SALE

     202   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     203   

Election to be Treated as a Corporation

     203   

Taxation of U.S. Holders

     204   

Taxation of Non-U.S. Holders

     208   

Backup Withholding and Certain Reporting Requirements

     208   

NON-UNITED STATES TAX CONSIDERATION

     210   

Marshall Islands Tax Consequences

     210   

UNDERWRITING

     211   

Commissions and Discounts

     211   

Option to Purchase Additional Shares

     212   

No Sales of Similar Securities

     212   

Listing

     212   

Price Stabilization, Short Positions and Penalty Bids

     213   

Electronic Distribution

     214   

Notice to Prospective Investors in Australia

     214   

Notice to Prospective Investors in the European Economic Area

     214   

Notice to Prospective Investors in Germany

     215   

Notice to Prospective Investors in Hong Kong

     215   

Notice to Prospective Investors in the Netherlands

     216   

 

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Notice to Prospective Investors in Switzerland

     216   

Notice to Prospective Investors in the United Kingdom

     216   

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

     217   

LEGAL MATTERS

     217   

EXPERTS

     217   

EXPENSES RELATED TO THIS OFFERING

     219   

WHERE YOU CAN FIND MORE INFORMATION

     219   

INDUSTRY AND MARKET DATA

     220   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A- FORM OF SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP
                     AGREEMENT OF NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

     A-1   

APPENDIX B- GLOSSARY OF TERMS

     B-1   

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all references to information and data in this prospectus about our business refer to the business and fleet that will be transferred to us in connection with this offering. Prior to the closing of this offering, we will not own interests in any vessels. You should read the entire prospectus carefully, including the historical financial statements and the notes to those financial statements. The information presented in this prospectus assumes, unless otherwise noted, that the underwriters’ option is not exercised. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units. We include a glossary of some of the terms used in this prospectus in Appendix B. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. Dollars. Unless otherwise indicated, all data regarding our fleet, the terms of our charters and all industry data is as of September 30, 2014.

References in this prospectus to “Navios Maritime Acquisition” refer, depending on the context, to Navios Maritime Acquisition Corporation or any one or more of its subsidiaries. References in this prospectus to “Navios Maritime Midstream Partners L.P.,” “the Partnership,” “we,” “our,” “us” or similar terms when used in a historical context refer to the assets of Navios Maritime Acquisition Corporation and its vessels and vessel-owning subsidiaries that are being sold, transferred or contributed to Navios Maritime Midstream Partners L.P. in connection with this offering. When used in the present tense or prospectively, those terms refer, depending on the context, to Navios Maritime Midstream Partners L.P. or any one or more of its subsidiaries, or to all of such entities.

References in this prospectus to “Navios Maritime Holdings” refer, depending on the context, to Navios Maritime Holdings Inc. or any one or more of its subsidiaries. References in this prospectus to the “Manager” refer to Navios Tankers Management Inc., a wholly owned subsidiary of Navios Maritime Holdings. References in this prospectus to “Navios Maritime Partners” refer to Navios Maritime Partners L.P. References in this prospectus to the “Navios Group” refer, depending on the context, to Navios Maritime Holdings, Navios Maritime Acquisition, Navios Maritime Partners, us and any one or more of our and their subsidiaries.

Navios Maritime Midstream Partners L.P.

We are a growth oriented limited partnership formed to own, operate and acquire crude oil tankers under long-term employment contracts. In the future, to the extent opportunities arise, we may also seek to own, operate and acquire refined petroleum product tankers, chemical tankers, and liquefied petroleum gas, or LPG, tankers under long-term employment contracts. Consistent with the chartering strategy of our affiliate, Navios Maritime Partners (NYSE: NMM), which charters its dry bulk and container vessels under long-term employment contracts, we intend to charter our vessels under long-term employment contracts to international oil companies, refiners, and large vessel operators.

Our initial fleet consists of four VLCCs, which have an average remaining employment term of approximately 7.7 years. They are chartered to two strong counterparties, Cosco Dalian, which is wholly owned by the COSCO Group, a Chinese state-owned enterprise, and Formosa Petrochemical, a Taiwan Stock Exchange-listed company with a market capitalization of approximately $23 billion. Pursuant to the share purchase agreement we will enter into with Navios Maritime Acquisition, we will have the right to purchase seven additional VLCCs from Navios Maritime Acquisition. Generally, we expect to finance the acquisition of any or all of the seven additional VLCCs we may elect to purchase with cash from operations, bank borrowings and the issuance of debt and equity securities.

Our parent, Navios Maritime Acquisition (NYSE: NNA), owns 44 vessels which include 29 product tankers, eleven very large crude carriers, or VLCCs, and four chemical tankers and is 43.1% owned by Navios Maritime Holdings (NYSE: NM). Navios Maritime Holdings has expanded the fleet under its direct control from 27

 

 

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vessels at its initial public offering in November 2005 to 63 vessels as of August 2014, making it one of the world’s largest independent drybulk operators. Through its investments in Navios Maritime Partners and Navios South American Logistics Inc., the Navios Group controls an additional 25 dry bulk vessels, seven container vessels, 363 barges and push boats, six product tankers and two port terminals. Upon the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional common units, Navios Maritime Acquisition will own a 57.5% interest in us, including a 2% general partner interest through our general partner which Navios Maritime Acquisition owns and controls. We plan to use the expertise and reputation of Navios Maritime Acquisition and the Navios Group to pursue additional growth opportunities by acquiring vessels for use with long-term charters in the crude, refined products, chemical, and LPG shipping sectors. Our affiliate, Navios Maritime Partners, has successfully deployed a similar chartering strategy in the drybulk and containership markets, employing vessels on long-term charters with quality counterparties. Since its inception in November 2007, Navios Maritime Partners has grown its fleet from eight vessels at its initial public offering to 32 vessels as of August 2014.

We believe that the large energy customers we seek to do business with continue to see securing access to transportation capacity with operators that have high standards of performance, reliability and safety as critical to their midstream value chain. From 2003 to 2009, the number of VLCC time charter fixtures more than doubled, based on data from Drewry, as customers looked to secure more vessels on long-term employment. As global demand for energy continues to grow, we believe that our customers will seek to further secure more vessels on long-term charters. We believe employing vessels on long-term charters can generate very attractive risk-adjusted returns through the shipping cycle, particularly as rates continue to recover from historically low levels, which we believe they will. Based on Drewry’s industry data, a second hand, five-year old VLCC acquired and deployed on a three year time charter has generated approximately 9% to 13% in unlevered returns in any given year from 2003 to 2013.

Navios Maritime Holdings will manage the commercial and technical operation of our fleet through the Manager, a wholly-owned subsidiary of Navios Maritime Holdings. Navios Maritime Holdings has an experienced management team with a long track record, a reputation for technical expertise in managing and operating vessels, and strong relationships with leading charterers and shipyards. We believe we will have stable and growing cash flows through the combination of the long-term nature of our charters, our commercial and technical management agreement with the Manager, which provides for a fixed management fee for two years from the closing of this offering, and our options to purchase additional VLCCs through the share purchase agreement we will enter into with Navios Maritime Acquisition.

Our Initial Fleet

The following table provides summary information about our initial fleet as of October 27, 2014:

 

Vessels

   Type      Built/
Delivery

Date
     DWT      Net
Charter
Rate(1)
     Profit Share to Owner    Expiration
Date(2)
   Remaining
Payment
Period

Shinyo Ocean

     VLCC         2001         281,395         38,400       50% above $43,500(4)    January 2017    4.2 years(3)

Shinyo Kannika

     VLCC         2001         287,175         38,025       50% above $44,000(5)    February 2017    4.3 years(3)

Shinyo Saowalak

     VLCC         2010         298,000         48,153       35% above $54,388(6)

40% above $59,388(6)

50% above $69,388(6)

   June 2025    10.6 years

Shinyo Kieran

     VLCC         2011         297,066         48,153       35% above $54,388(6)

40% above $59,388(6)

50% above $69,388(6)

   June 2026    11.6 years

 

(1) Net time charter-out rate per day in dollars (net of commissions).
(2) Estimated dates assuming midpoint of redelivery of charterers.

 

 

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(3) Reflects an initial charter length of 2.2 years and a backstop period of 2.0 years for Shinyo Ocean. Reflects an initial charter length of 2.3 years and a backstop period of 2.0 years for Shinyo Kannika. During the respective backstop period following the scheduled redelivery of each vessel, Navios Maritime Acquisition will provide a backstop commitment at the currently contracted rate if the market charter rate during the backstop period is lower than the agreed upon floor rate. Conversely, if market charter rates are higher during the backstop period, such vessels will be chartered out to third-party charterers at prevailing market rates and Navios Maritime Acquisition’s backstop commitment will not be triggered. The backstop commitment does not include the profit share as set forth in the table. All data in the table is based on a charter length inclusive of both the initial and backstop periods.
(4) Calculated semi-annually on the basis of the daily values of the Baltic Exchange Tanker Route AG/Japan for the past two quarters adjusted for the vessel’s specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(5) Calculated semi-annually on the basis of the weighted average of the daily values of four Baltic Exchange Tanker Routes for the past two quarters adjusted for certain agreed specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(6) Calculated annually on the basis of the weighted average of the daily values of four Baltic Exchange Tanker Routes for the past four quarters adjusted for certain agreed specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.

Option Vessels

We will have options, exercisable for a period of two years following from the closing of this offering, to purchase the following seven VLCCs from Navios Maritime Acquisition at fair market value. Although we anticipate that we may exercise some or all of our options to purchase the following seven VLCCs, the timing of such purchases is uncertain and each such purchase is subject to various conditions, including reaching an agreement with Navios Maritime Acquisition regarding the fair market value of the vessel and the availability of financing, which we anticipate would be from external sources. Generally, we expect to finance the acquisition of any or all of the seven additional VLCCs we may elect to purchase with cash from operations, bank borrowings and the issuance of debt and equity securities.

The following table provides summary information about the vessels subject to the options as of October 27, 2014:

 

Vessels

  Type     Built/
Delivery

Date
    DWT     Net Charter
Rate(1)
  Profit Share to Owner   Expiration Date(2)   Remaining
Payment

Period

C. Dream

    VLCC        2000        298,570      29,625   50% above $30,000(6)

40% above $40,000(6)

  March 2019   4.4 years

Nave Celeste

    VLCC        2003        298,717      42,705     December 2016   4.1 years(5)

Nave Galactic

    VLCC        2009        297,168      Floating Rate(3)     February 2015   4.3 years(5)

Nave Quasar

    VLCC        2010        297,376      20,475   50% above $24,375(7)   February 2015   4.3 years(5)

Nave Buena Suerte

    VLCC        2011        297,491      Floating Rate(4)     March 2015   0.4 years

Nave Neutrino

    VLCC        2003        298,287      Floating Rate(3)     December 2014   0.1 years

Nave Electron

    VLCC        2002        305,178      Floating Rate(4)     July 2015   0.7 years

 

(1) Net time charter-out rate per day in dollars (net of commissions).
(2) Estimated dates assuming midpoint of redelivery of charterers.
(3) Rate is based upon daily Baltic International Tanker Routes, Route Tanker Dirty 3 ME Gulf to Japan adjusted for vessel’s service speed/cons.

 

 

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(4) Rate based on VLCC pool earnings.
(5) Reflects an initial charter length of 2.1 years and a backstop period of 2.0 years for Nave Celeste. Reflects an initial charter length of 0.3 years and a backstop period of 4.0 years for both Nave Galactic and Nave Quasar. During the respective backstop period following the scheduled redelivery of each vessel, Navios Maritime Acquisition will provide a backstop commitment at the net time charter-out rate per day (net of commissions) of $35,000 if the market charter rate during the backstop period is lower than the agreed upon floor rate. Conversely, if market charter rates are higher during the backstop period, such vessels will be chartered out to third-party charterers at prevailing market rates and Navios Maritime Acquisition’s backstop commitment will not be triggered. The backstop commitment does not include the profit share as set forth in the table. All data in the table is based on a charter length inclusive of both the initial and backstop periods.
(6) Calculated annually based on the actual earnings of the vessel. Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(7) Calculated semi-annually based on the actual earnings of the vessel. Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.

Our Relationships with Navios Maritime Holdings and Navios Maritime Acquisition

One of our key strengths is our relationships with Navios Maritime Holdings (NYSE: NM) and Navios Maritime Acquisition (NYSE: NNA).

Navios Maritime Holdings is one of the world’s largest independent drybulk operators with a market capitalization of approximately $635.0 million as of September 30, 2014. Navios Maritime Holdings’ business was established by United States Steel Corporation in 1954 and has over 50 years of experience working with raw material producers, agricultural traders and exporters, and industrial end-users. The key members of Navios Maritime Holdings’ management team have on average over 20 years of experience in the shipping industry.

Navios Maritime Acquisition, our parent, owns a large fleet of modern crude oil, refined petroleum product and chemical tankers providing world-wide marine transportation services and has a market capitalization of approximately $411.0 million as of September 30, 2014. Navios Maritime Acquisition’s strategy is to charter its vessels to international oil companies, refiners and large vessel operators under long, medium and short-term charters. Navios Maritime Acquisition is committed to providing quality transportation services and developing and maintaining long-term relationships with its customers.

We intend to use Navios Maritime Holdings’ and Navios Maritime Acquisition’s extensive experience and relationships to secure long-term time charters for our vessels.

Business Opportunities

We believe that the following factors create opportunities for us to successfully execute our business plan and grow our business:

Increasing demand for seaborne transportation of crude oil.

 

    Growing demand for oil consumption. World oil consumption has increased steadily over the past 15 years, with the exception of 2008 and 2009, as a result of increasing global economic activity and industrial production. Oil consumption in developing countries has been increasing due to growing demand for power generation, transportation and the development of infrastructure and raw materials.

 

   

Growing distances of transportation. Due to changes in regional oil consumption and the increasing demand for long voyage lengths such as the Middle East to Asia and West Africa to Asia, seaborne oil trade distance has been growing. This is especially beneficial to VLCC and Suezmax tanker operators

 

 

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because of larger economies of scale for long voyages. The shift in global refinery capacity from the developed to the developing world is also having a positive impact on the seaborne oil trade given increasing distances from production sources to refineries, which further bolsters ton-mile demand.

 

    Increasing Asian oil import volumes. Asia is emerging as the dominant user of VLCC vessels. During the period from 2003 to 2013, Chinese crude oil imports increased by a CAGR of 15.1% and Indian imports increased by a CAGR of 7.6%. The growth in VLCC ton miles will continue as China imports more crude from Venezuela, Brazil and West Africa as it diversifies its sources of oil. Indian companies have recently secured crude oil from Brazil to replace existing Iranian supplies increasing VLCC ton mile demand. China is the world’s second largest consumer of oil, importing more than half of its requirements and will likely surpass the U.S. as the world’s largest importer next year growing to about 14 mbpd by 2035.

 

    Increasing U.S. energy exports driven by production of U.S. shale oil deposits. The growth in the U.S. of shale-derived oil and gas has led to increased seaborne exports of refined petroleum products and natural gas liquids, such as gasoline and LPG. Based on U.S. Energy Information Administration (“EIA”) data, U.S. exports of total petroleum products increased at a CAGR of 15% between 2008 and 2013. Furthermore, many major U.S. refiners have applied to the U.S. Commerce Department for a license to export condensate, a lightly refined petroleum product. The future growth of such exports, as well as the potential ability to export crude oil, will require greater tanker shipping capacity.

Increasing demand for long-term time charter contracts with modern VLCC vessels. As global demand for energy continues to grow, we believe that our customers will seek to secure more vessels on long-term charters. For the large energy customers we seek to do business with, securing access to transportation capacity is critical to their midstream value chain. From 2003 to 2009, the number of VLCC time charter fixtures more than doubled, based on data from Drewry, as customers looked to secure more vessels on long-term employment.

Stringent customer standards favor large, high-quality operators. Major energy companies are highly selective in their choice of crude oil vessel operators, particularly for long-term charters, and have established strict operational and financial standards that they use to pre-qualify, or vet, tanker operators prior to entering into charters. The VLCC tanker industry is highly fragmented with more than 80% of the 132 VLCC tanker owners owning fewer than 10 vessels and operators of large fleets will be able to better serve customers and benefit from economies of scale.

We can provide no assurance, however, that the industry dynamics described above will continue or that we will be able to capitalize on such business opportunities. For further discussion of the risks that we face, see “Risk Factors” beginning on page 20 of this prospectus. Please read “The International Oil Tanker Shipping Industry” beginning on page 121 of this prospectus.

Competitive Strengths

We believe we are well positioned to capitalize on existing business opportunities because of the following competitive strengths:

 

    Stable cash flows based on long-term charters. We believe that the long-term, fixed-rate nature of our charters, our profit sharing arrangements and our fixed rate management agreement will provide a stable base of revenue and predictable expenses that will result in stable cash flows. In addition, we believe the potential exercise of our option to purchase seven additional VLCCs and the potential opportunity to purchase additional vessels from Navios Maritime Acquisition pursuant to the right of first offer given in connection with our omnibus agreement, provide visible future growth in our revenue, operating income and distributable cash flow. We believe these as well as future acquisition opportunities will provide us with a way to grow our distributions per unit.

 

 

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    Strong relationship with Navios Maritime Holdings. We believe our relationship with Navios Maritime Holdings and its affiliates provides us with numerous benefits that are key to our long-term growth and success, including Navios Maritime Holdings’ expertise in commercial management, reputation within the shipping industry and network of strong relationships with many of the world’s leading crude producers, traders and exporters, industrial end-users, shipyards, and shipping companies. We also benefit from Navios Maritime Holdings’ expertise in technical management and its ability to meet the rigorous vetting processes of some of the world’s most selective major international oil companies.

 

    Modern fleet built to high specifications. Following this offering, our fleet will consist of four modern VLCCs. We will also have an option to acquire seven additional VLCCs. We believe that our high-quality fleet provides us with a competitive advantage in the time charter market, where vessel age and quality are of significant importance in competing for business. We have completed the pre-qualification process required by major energy companies, including BP, Chevron, Philips 66, Shell, Vela International Marine and Koch Industries and we believe our ability to comply with these rigorous and comprehensive standards relative to less qualified or less experienced operators allows us to compete effectively for new charters.

 

    Operating visibility through long-term charters with strong counterparties. All of our vessels are chartered out under long-term time charters with an average remaining employment term of 7.7 years to two strong counterparties, Cosco Dalian, which is wholly owned by the COSCO Group, a Chinese state-owned enterprise, and Formosa Petrochemical, a Taiwan Stock Exchange-listed company with a market capitalization of approximately $23 billion. We believe our existing charter coverage with strong counterparties provides us with predictable contracted revenues and operating visibility.

 

    Financial strength and flexibility. Upon the closing of this offering, we will enter into a new credit facility that will provide us with a portion of the funds we will use to purchase our initial fleet. We are targeting a relatively conservative leverage profile at the closing of this offering, in order to allow for future flexibility in capital deployment. We also believe we will have access to public debt and equity markets in order to pursue expansion opportunities.

We can provide no assurance, however, that we will be able to utilize our strengths described above. For further discussion of the risks that we face, see “Risk Factors” beginning on page 20 of this prospectus.

Business Strategies

Our primary business objective is to increase quarterly distributions per unit over time by executing the following strategies:

 

    Continue to grow and diversify our fleet of owned and chartered-in vessels. We will seek to make strategic acquisitions to expand our fleet in order to capitalize on the demand for crude, refined product, chemical and LPG tankers in a manner that is accretive to distributable cash flow per unit. Under the share purchase agreement that we will enter into with Navios Maritime Acquisition, we will have the option to purchase seven additional VLCC vessels. Additionally, during the term of the omnibus agreement, we will have the right to purchase from Navios Maritime Acquisition any VLCC, crude oil tanker, refined petroleum product tanker, chemical tanker or LPG tanker under a long-term charter agreement or existing VLCC, crude oil tanker, refined petroleum product tanker, chemical tanker or LPG tanker in the Navios Maritime Acquisition fleet that enters into a long-term charter agreement of five years or more. We believe that our long-term charters, strong relationships with reputable shipyards and financial flexibility will allow us to make additional accretive acquisitions based on our judgment and experience as to prevailing market conditions.

 

   

Pursue stable cash flows through long-term charters for our fleet. We intend to continue to utilize long-term, fixed-rate charters for our existing fleet through renewal of existing or new charters with

 

 

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built-in profit sharing arrangements. Currently, the vessels in our fleet have an average remaining employment term of 7.7 years and have staggered charter expirations with no more than two vessels subject to re-chartering in any one year. Our long-term, fixed-rate charters with profit sharing will provide us stable cash flows.

 

    Our relationship with the Navios Group provides us with several commercial and operational advantages. In a highly fragmented industry, we believe that our relationship with the Navios Group provides us with several advantages. First, it creates economies of scale resulting in efficient spreading of overhead and other costs, which in turn results in lower operating expenditures than the industry average. Second, we believe that major oil companies and oil producers generally prefer to charter tankers from a limited number of large tanker fleet operators from whom they have previously chartered tankers and whose fleets they have pre-approved for quality, rather than smaller shipping companies which constitute a large proportion of the highly fragmented international tanker fleet. Finally, the Navios Group’s active and extensive involvement in the large tanker market provides us with access to reliable, in-depth and up-to-date market information.

 

    Provide superior customer service by maintaining high standards of performance, reliability and safety. Our customers seek transportation partners that have a reputation for high standards of performance, reliability and safety. We intend to use Navios Maritime Holdings’ excellent vessel safety record, compliance with rigorous health, safety and environmental protection standards, operational expertise and customer relationships to further expand a sustainable competitive advantage and consistent delivery of superior customer service.

We can provide no assurance, however, that we will be able to implement our business strategies described above. For further discussion of the risks that we face, see “Risk Factors” beginning on page 20 of this prospectus.

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units, including those set forth below. Please read carefully these and other risks described under “Risk Factors” beginning on page 20 of this prospectus.

 

    We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution on our common units following the establishment of cash reserves and payment of fees and expenses.

 

    Our initial fleet consists of only four vessels. Any limitation on the availability or operation of those vessels could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

    We are focused on employing vessels on long-term charters of at least five years, which may not be typical for the crude oil, refined petroleum product, chemical and liquefied petroleum gas sectors of the seaborne transportation industry.

 

    We depend on two customers for our revenue. Charterers may terminate or default on their obligations to us, which could materially adversely affect our results of operations and cash flow, and breaches of the charters may be difficult to enforce.

 

    Charter rates in the crude oil, product and chemical tanker sectors of the seaborne transportation industry in which we operate have significantly declined from historically high levels in 2008 and may remain depressed or decline further in the future, which may adversely affect our earnings.

 

    We must make substantial capital expenditures to maintain and expand our fleet, which will reduce our cash available for distribution.

 

 

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    Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.

 

    We depend on Navios Maritime Holdings, Navios Maritime Acquisition and their affiliates to assist us in operating and expanding our business.

 

    Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners and their respective affiliates may compete with us.

 

    Unitholders have limited voting rights and our partnership agreement restricts the voting rights of unitholders owning more than 4.9% of our common units.

 

    Our general partner and its affiliates, including Navios Maritime Acquisition, own a significant interest in us and have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor their own interests to your detriment.

 

    Fees and cost reimbursements, which our manager will determine for services provided to us, will be significant, will be payable regardless of profitability and will reduce our cash available for distribution.

 

    Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner, and even if public unitholders are dissatisfied, they will be unable to remove our general partner without Navios Maritime Acquisition’s consent, unless Navios Maritime Acquisition’s ownership share in us is decreased.

 

    You will experience immediate and substantial dilution of $8.62 per common unit.

 

    Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

Implications of Being an Emerging Growth Company

We had less than $1.0 billion in revenue during our last fiscal year, which means that we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

    the ability to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the registration statement of its initial public offering;

 

    exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting; and

 

    exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the “PCAOB”, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and financial statements.

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company as of the earliest to occur of: (i) the last day of the fiscal year during which we had $1 billion or more in annual gross revenues; (ii) the date of our issuance, in a three-year period, of more than $1 billion in non-convertible debt; or (iii) the date on which we are deemed to be a “large accelerated filer” as defined for purposes of the Securities Exchange Act of 1934, or the “Exchange Act”, which will occur if the market value of our common units held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter. We may choose to take advantage of some, but not all, of these reduced burdens. For as

 

 

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long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies.

Noncompetition

Pursuant to the omnibus agreement that we, Navios Maritime Acquisition, Navios Maritime Holdings and Navios Maritime Partners will enter into in connection with the closing of this offering, Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners and their controlled affiliates (other than us, our general partner and our subsidiaries) generally will agree not to acquire or own any VLCCs, crude oil tankers, refined petroleum product tankers, chemical tankers or LPG tankers under time charters of five or more years without the consent of our general partner. The omnibus agreement, however, contains significant exceptions that will allow Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners or any of their controlled affiliates to compete with us under specified circumstances which could harm our business. In addition, under the omnibus agreement, we generally will agree only to acquire VLCCs, crude oil tankers, refined petroleum product tankers, chemical tankers or LPG tankers with charters of five or more years, subject to certain exceptions. If we own or operate a vessel pursuant to such exceptions, we may not subsequently expand that portion of our business other than pursuant to those exceptions. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Noncompetition.”

Formation Transactions

General

We were formed on October 13, 2014 as a Marshall Islands limited partnership to own, operate and acquire crude oil tankers, refined petroleum product tankers, chemical tankers, and LPG tankers under long-term employment contracts. Navios Maritime Midstream Partners GP LLC, a wholly-owned subsidiary of Navios Maritime Acquisition, was formed on October 13, 2014 to act as our general partner. The following transactions will occur in connection with this offering:

 

    We will sell 8,100,000 common units to the public in this offering, representing a 42.5% limited partner interest in us;

 

    We will enter into a new credit facility that will provide us with financing availability of up to $126.0 million, and we will borrow $126.0 million thereunder upon the closing of the offering; and

 

    At or immediately after the closing of this offering, Navios Maritime Acquisition will contribute to us all of the outstanding shares of capital stock of two of Navios Maritime Acquisition’s vessel-owning subsidiaries (Shinyo Ocean Limited and Shinyo Kannika Limited) and Navios Maritime Acquisition will sell to us all of the outstanding shares of capital stock of two of Navios Maritime Acquisition’s vessel-owning subsidiaries (Shinyo Kieran Limited and Shinyo Saowalak Limited) in exchange for total consideration of: (i) all of the net proceeds from this offering ($148.3 million based on the assumed initial public offering price of $20.00 per common unit), (ii) $110.6 million of the $126.0 million that we will borrow under the new credit facility that we will enter into at the closing of this offering, (iii) the issuance of 9,342,692 subordinated units and 1,242,692 common units to Navios Maritime Acquisition and (iv) the issuance of 381,334 general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights, which will entitle the holder to increasing percentages of the cash we distribute in excess of $0.4774 per unit per quarter, to Navios Maritime Midstream Partners GP LLC, our general partner. See “Use of Proceeds.”

 

 

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In addition, at or prior to the closing of this offering, we will enter into the following agreements:

 

    share purchase agreement pursuant to which we will have options, exercisable at any time during a two-year period, to acquire the capital stock of seven subsidiaries that own seven VLCCs and related time charters;

 

    a management agreement with the Manager pursuant to which the Manager will agree to provide us commercial and technical management services;

 

    an administrative services agreement with the Manager, pursuant to which the Manager will agree to provide to us administrative services; and

 

    an omnibus agreement with Navios Maritime Holdings, Navios Maritime Acquisition, Navios Maritime Partners, our general partner and others, governing, among other things:

 

    when we, Navios Maritime Acquisition, Navios Maritime Holdings and Navios Maritime Partners may compete with each other; and

 

    certain rights of first offer on VLCCs, crude oil tankers, refined petroleum product tankers, chemical tankers and LPG tankers.

Please read “Certain Relationships and Related Party Transactions.”

We believe that conducting our operations through a publicly traded limited partnership will offer us the following advantages:

 

    access to the public equity and debt capital markets;

 

    a lower cost of capital for expansion and acquisitions; and

 

    an enhanced ability to use equity securities as consideration in future acquisitions.

Holding Company Structure

We are a holding entity and will conduct our operations and business through subsidiaries, as is common with publicly traded limited partnerships, to maximize operational flexibility. Initially, our operating company, a limited liability company organized in the Marshall Islands, will be our only directly owned subsidiary and will conduct all of our operations through itself and its subsidiaries.

 

 

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Organizational Structure After the Transactions

The following diagram depicts our simplified organizational structure after giving effect to the transactions described above and assuming no exercise of the underwriters’ option to purchase additional common units:

 

    Number of
Units
    Percentage
Ownership
 

Public Common Units

    8,100,000        42.5

Navios Maritime Acquisition Common Units

    1,242,692        6.5

Navios Maritime Acquisition Subordinated Units

    9,342,692        49.0

General Partner Units

    381,334        2.0
 

 

 

   

 

 

 

Total

    19,066,718        100.0
 

 

 

   

 

 

 

 

LOGO

 

* Navios Maritime Holdings will have a ten-year option to purchase a minimum of 25% of the general partner interest held by the general partner, the incentive distribution rights held by the general partner and/or the membership interests of the general partner from Navios Maritime Acquisition at fair market value.

Principal Executive Offices and Internet Address; SEC Filing Requirements

Our principal executive offices are located at 7 Avenue de Grande Bretagne, Office 11B2, Monte Carlo, MC 98000 Monaco, and our phone number is (011) + (377) 9798-2140. We expect to make our periodic reports and

 

 

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other information filed with or furnished to the SEC available, free of charge, through our website at www.navios-midstream.com, which will be operational after this offering, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website, including Navios Maritime Acquisition’s website, is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. Please read “Where You Can Find More Information” for an explanation of our reporting requirements as a foreign private issuer.

Summary of Conflicts of Interest and Fiduciary Duties

Our general partner and our directors have a legal duty to manage us in a manner beneficial to our unitholders, subject to the limitations described below and under “Conflicts of Interest and Fiduciary Duties.” This legal duty is commonly referred to as a “fiduciary” duty. Similarly, our directors and officers have fiduciary duties to manage us in a manner beneficial to us, our general partner and our limited partners. As a result of these relationships, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and Navios Maritime Holdings, Navios Maritime Acquisition and their other affiliates, including our general partner, on the other hand. In particular:

 

    two of our executive officers, excluding our Chief Financial Officer, are also executive officers of Navios Maritime Acquisition and three of our executive officers and one of our directors also serve as executive officers and/or directors of Navios Maritime Holdings;

 

    Navios Maritime Holdings, Navios Maritime Acquisition, Navios Maritime Partners and their other affiliates may compete with us; and

 

    we have entered into arrangements, and may enter into additional arrangements, with Navios Maritime Holdings, Navios Maritime Acquisition, Navios Maritime Partners and certain of their subsidiaries, relating to the purchase of additional vessels, the provision of certain services and other matters. In the performance of their obligations under these agreements, Navios Maritime Holdings, Navios Maritime Acquisition, Navios Maritime Partners and their subsidiaries, other than Navios Maritime Midstream Partners GP LLC, are not held to a fiduciary duty standard of care to us, our general partner or our limited partners, but rather to the standard of care specified in these agreements.

Please read “Management—Directors and Executive Officers” and “Certain Relationships and Related Party Transactions.”

Although a majority of our directors will over time be elected by common unitholders, our general partner will likely have substantial influence on decisions made by our board of directors.

For a more detailed description of the conflicts of interest and fiduciary duties of our general partner and its affiliates, please read “Conflicts of Interest and Fiduciary Duties.” For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

In addition, our partnership agreement contains provisions that reduce the standards to which our general partner and our directors would otherwise be held under Marshall Islands law. For example, our partnership agreement limits the liability and reduces the fiduciary duties of our general partner and our directors to our unitholders. Our partnership agreement also restricts the remedies available to unitholders. By purchasing a common unit, you are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner, its affiliates or our directors, all as set forth in the partnership agreement. Please read “Conflicts of Interest and Fiduciary Duties” for a description of the fiduciary duties that would otherwise be imposed on our general partner, its affiliates and our directors under Marshall Islands law, the material modifications of those duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders under Marshall Islands law.

 

 

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The Offering

 

Common units offered to the public by us

8,100,000 common units; or 9,315,000 common units if the underwriters exercise their option in full.

 

Units outstanding after this offering

9,342,692 common units and 9,342,692 subordinated units, representing a 49% and 49% limited partner interest in us, respectively.

 

Use of proceeds

The proceeds from this offering will be used primarily to fund a portion of the purchase price of the capital stock in the subsidiaries of Navios Maritime Acquisition that own two of the four vessels in our initial fleet.

 

  The purchase price of the capital stock of the subsidiaries that own the four vessels in our initial fleet will be equal to:

 

    all of the net proceeds from our sale of an aggregate of 8,100,000 common units in this offering (estimated at $148.3 million, based on the assumed initial public offering price of $20.00 per common unit), plus

 

    $110.6 million of the $126.0 million of borrowings under our new credit facility, plus

 

    9,342,692 subordinated units to be issued to Navios Maritime Acquisition and 1,242,692 common units to be issued to Navios Maritime Acquisition, plus

 

    the 2.0% general partner interest and all of our incentive distribution rights to be issued to our general partner.

 

  Based on the assumed initial public offering price of $20.00 per common unit and assuming that the fair market value of each subordinated unit and general partner unit is $20.00, the total dollar value of the consideration to be paid to Navios Maritime Acquisition for the capital stock of the subsidiaries that own the four vessels in our initial fleet is approximately $478.2 million.

 

  The initial public offering price of our common units, as well as the total consideration to be paid to Navios Maritime Acquisition for the capital stock of the subsidiaries that own the four vessels in our initial fleet was determined through negotiations among us and the representatives of the underwriters. In addition to prevailing market conditions, the factors considered in determining the initial public offering price as well as the total consideration for the capital stock of the subsidiaries that own the vessels in our initial fleet were:

 

    the valuation multiples of publicly traded companies that the representatives believe to be comparable to us,

 

    our financial information,

 

 

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    the history of, and the prospects for, our partnership and the industry in which we compete,

 

    an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, and

 

    the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

 

  Please read “Underwriting.”

 

Underwriters’ option

We have granted the underwriters a 30-day option to purchase up to 1,215,000 additional common units. We will use the net proceeds of any exercise of the underwriters’ option to redeem for cash a number of common units from Navios Maritime Acquisition equal to the number of units for which the underwriters exercise their option.

 

Cash distributions

We intend to make minimum quarterly distributions of $0.4125 per common unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. In general, we will pay any cash distributions we make each quarter in the following manner:

 

    first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received a minimum quarterly distribution of $0.4125 plus any arrearages from prior quarters;

 

    second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.4125; and

 

    third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received an aggregate distribution of $0.4744.

 

 

If cash distributions exceed $0.4744 per unit in a quarter, our general partner will receive increasing percentages, up to 50.0% (including its 2.0% general partner interest), of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement and in the glossary of terms attached as Appendix B. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distribution to be distributed on all units. The amount of available cash we need to pay the minimum quarterly distributions for four

 

 

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quarters on our common units, subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering, assuming no exercise of the underwriters’ option to purchase additional common units, is $31.5 million.

 

  We believe, based on the estimates contained in and the assumptions listed under “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Results of Operations for the Twelve Months Ending September 30, 2015” and “—Forecast Assumptions and Considerations” that we will have sufficient cash available for distributions to enable us to pay all of the minimum quarterly distribution of $0.4125 per unit on all of our common and subordinated units for each quarter through September 30, 2015. However, unanticipated events may occur which could materially adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned to not place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition. Please read “Our Cash Distribution Policy and Restrictions on Distributions—Pro Forma and Forecasted Cash Available for Distribution” and “How We Make Cash Distributions—Subordination Period.”

 

Subordinated units

Navios Maritime Acquisition will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period the subordinated units are entitled to receive the minimum quarterly distribution of $0.4125 per unit only after the common units have received the minimum quarterly distribution and arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. The subordination period generally will end if we have earned and paid at least $0.4125 on each outstanding unit and the corresponding distribution on the general partner’s 2.0% interest for any three consecutive four-quarter periods ending on or after September 30, 2017. The subordination period may also end prior to September 30, 2017 if certain financial tests are met as described below. When the subordination period ends, all subordinated units will automatically convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. Please read “How We Make Cash Distributions—Subordination Period.”

 

Early conversion of subordinated units

If we have earned and paid at least $2.475 (150% of the annualized minimum quarterly distribution) on each outstanding unit for the four-quarter period ending on or before the date of determination, the subordinated units will convert into common units. Please read “How We Make Cash Distributions—Subordination Period.”

 

 

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Issuance of additional units

Our partnership agreement allows us to issue an unlimited number of units without the consent of our unitholders.

 

  Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Securities.”

 

Board of directors

We will hold a meeting of the limited partners every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. Our general partner has the right to appoint three of the seven members of our board of directors who will serve as directors for terms determined by our general partner. At our 2015 annual meeting, the common unitholders will elect four of our seven directors. The four directors elected by our common unitholders at our 2015 annual meeting will be divided into three classes to be elected by our common unitholders annually on a staggered basis to serve for three-year terms.

 

Voting rights

Each outstanding common unit is entitled to one vote on matters subject to a vote of common unitholders. If at any time, any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders or calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes under our partnership agreement, unless otherwise required by law. The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other unitholders of the same class that are not subject to this voting limitation. Our general partner, its affiliates, and persons who acquired units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors. This 4.9% limitation is intended to help preserve our ability to qualify for the benefits of Section 883 of the U.S. Internal Revenue Code, as amended, or the Code.

 

 

You will have no right to elect our general partner on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 23% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, Navios Maritime Acquisition will own all of our subordinated units representing 50.0% of the total number of common and subordinated units. As a result, you will initially be unable to remove our general partner without Navios Maritime Acquisition’s consent because Navios Maritime Acquisition will own sufficient units upon completion of this offering to be able

 

 

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to prevent the general partner’s removal and Navios Maritime Acquisition will have the right to acquire additional units in the future to maintain its percentage interest in our partnership. Please read “The Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates, including Navios Maritime Acquisition, own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before the notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right.

 

U.S. federal income tax considerations

Although we are organized as a partnership, we have elected to be treated as a corporation for U.S. federal income tax purposes. Under current U.S. federal income tax law, a portion of the distributions you receive from us will constitute dividends, and if you are an individual citizen or resident of the United States or a U.S. estate or trust and meet certain holding period requirements, such dividends are expected to be taxable as “qualified dividend income” currently subject to a maximum 20% U.S. federal income tax rate. The remaining portion of our distributions will be treated first as a non-taxable return of capital to the extent of your tax basis in your common units and, thereafter, as capital gain. We estimate that if you hold the common units that you purchase in this offering through the period ending December 31, 2018, the distributions you receive that will constitute dividends for U.S. federal income tax purposes will be approximately 22% of the total cash distributions received during that period. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions” for the basis for this estimate.

 

Exchange listing

The common units have been cleared for listing on the New York Stock Exchange under the symbol “NAP.”

 

 

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Summary Selected Historical and Pro Forma Combined Financial and Operating Data

The following table presents in each case for the periods and at the dates indicated summary historical combined financial data, unaudited pro forma financial data and operating data of Navios Maritime Midstream Partners Predecessor. We have derived the summary historical combined financial data for the years ended December 31, 2013 and 2012 from our audited combined financial statements appearing elsewhere in this prospectus. The summary historical combined financial data as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013 are derived from our unaudited combined financial statements appearing elsewhere in this prospectus. The combined financial statements included in the prospectus have been carved-out of the consolidated financial statements of Navios Maritime Acquisition, which owned the VLCCs that we will acquire in connection with this offering during the periods ended September 30, 2014, December 31, 2013 and 2012. Results of operations have been included from the respective dates that the vessel-owning subsidiaries were acquired. Navios Maritime Acquisition’s shipping interests and other assets, liabilities, revenues and expenses that do not relate to the vessel-owning subsidiaries to be acquired by us are not included in our combined financial statements. Our financial position, results of operations and cash flows reflected in our combined financial statements include all expenses allocable to our business, but may not be indicative of those that would have been achieved had we operated as a public entity for all periods presented or of future results.

We have derived the selected pro forma financial data of Navios Maritime Midstream Partners L.P. as of September 30, 2014 and for the year ended December 31, 2013 and for the nine months ended September 30, 2014 from our unaudited pro forma combined financial statements included elsewhere in this prospectus. The pro forma income statement data for the year ended December 31, 2013 and the nine months ended September 30, 2014, assumes this offering and the related transactions occurred on January 1, 2013. The pro forma balance sheet assumes this offering and the related transactions occurred on September 30, 2014. The pro forma financial data may not be comparable to the historical financial data for the reasons set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A more complete explanation of the pro forma data can be found in our unaudited pro forma combined financial statements and accompanying notes included elsewhere in this prospectus.

 

 

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The following table should be read together with, and is qualified in its entirety by reference to, the historical combined financial statements, unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Pro Forma     Pro Forma     Historical  
(In thousands of U.S. dollars, except fleet data)   Nine Months
Ended
September 30,

2014
    Year Ended
December 31,

2013
    Nine Months
Ended
September 30,

2014
    Nine Months
Ended
September 30,

2013
    Year Ended
December 31,

2013
    Year Ended
December 31,

2012
 

Revenue

  $   47,526      $ 63,659      $ 47,526      $ 47,610      $    63,659      $ 64,059   

Time charter expenses

    (579     (900     (579     (689     (900     (1,185

Direct vessel expenses

    (994     (1,919     (994     (1,440     (1,919     (1,898

Management fees

    (10,374     (13,870     (10,670     (10,920     (14,600     (14,640

General and administrative expenses

    (1,500     (2,000     (756     (597     (866     (947

Depreciation and amortization

    (14,632     (19,508     (14,632     (14,632     (19,508     (20,211

Interest expenses and finance cost

    (2,951     (4,258     (21,343     (23,731     (31,249     (31,803

Loss on bond extinguishment

    —         —          —           —         (23,188     —     

Other income

    5       —          5        —         —          267   

Other expense

    —         (74     —         (20 )     (74     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income /(loss)

  $ 16,501      $ 21,130      $ (1,443   $ (4,419   $ (28,645   $ (6,373
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma income per common unit

  $ 0.87      $ 1.11           

 

    Pro Forma     Historical  
    As of
September 30,
2014
    As of
September 30,
2014
    As of
December 31,

2013
    As of
December 31,

2012
 

Balance Sheet Data (at period end)

       

Total current assets

  $ 20,974      $ 81,693      $ 45,944      $ 36,770   

Vessels, net

    324,284        324,284        336,452        352,674   

Total assets

    381,509        448,282        428,713        440,785   

Total current liabilities

    12,862        3,197        2,967        16,112   

Long-term debt, net of current portion

    115,496        341,034        341,034        356,287   

Owner’s net investment

  $   253,151      $ 104,051      $ 84,712      $ 43,586   
    Historical  
    Nine Months
Ended
September 30,

2014
    Nine Months
Ended
September 30,
2013
    Year Ended
December 31,

2013
    Year Ended
December 31,

2012
 

Cash Flow Data

       

Net cash provided by / (used in) operating activities

    15,029        (27,731     (39,054     5,247   

Net cash (used in) /provided by investing activities

    (38,906     4,291        (4,531     (31,225

Net cash provided by financing activities

    20,782        22,944        47,961        30,592   

Change in cash and cash equivalents

  $ (3,095   $ (496   $ 4,376      $ 4,614   

Fleet Data

       

Vessels at end of period

    4        4        4        4   

 

 

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RISK FACTORS

Although many of our business risks are comparable to those a corporation engaged in a similar business would face, limited partner interests are inherently different from the capital stock of a corporation. You should carefully consider the following risk factors together with all of the other information included in this prospectus when evaluating an investment in our common units.

If any of the following risks actually occur, our business, financial condition, cash flows or operating results could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.

Risk Inherent in Our Business

We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution on our common units following the establishment of cash reserves and payment of fees and expenses.

We may not have sufficient cash available each quarter to pay the minimum quarterly distribution of $0.4125 per common unit following the establishment of cash reserves and payment of fees and expenses. The amount of cash we can distribute on our common units principally depends upon the amount of cash we generate from our operations, which may fluctuate based on numerous factors generally described under this “Risk Factors” heading, including, among other things:

 

    the rates we obtain from our charters and the market for long-term charters when we recharter our vessels;

 

    the level of our operating costs, such as the cost of crews and insurance, following the expiration of our management agreement pursuant to which we will pay a fixed daily fee for an initial term of approximately two years from the closing of this offering;

 

    the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled inspection, maintenance or repairs of submerged parts, or drydocking, of our vessels;

 

    demand for crude oil;

 

    supply of VLCCs;

 

    prevailing global and regional economic and political conditions; and

 

    the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business.

The actual amount of cash we will have available for distribution also will depend on other factors, some of which are beyond our control, such as:

 

    the level of capital expenditures we make, including those associated with maintaining vessels, building new vessels, acquiring existing vessels and complying with regulations;

 

    our debt service requirements and restrictions on distributions contained in our debt instruments;

 

    interest rate fluctuations;

 

    the cost of acquisitions, if any;

 

    fluctuations in our working capital needs;

 

    our ability to make working capital borrowings, including the payment of distributions to unitholders; and

 

    the amount of any cash reserves, including reserves for future maintenance and replacement capital expenditures, working capital and other matters, established by our board of directors in its discretion.

 

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The amount of cash we generate from our operations may differ materially from our profit or loss for the period, which will be affected by non-cash items. As a result of this and the other factors mentioned above, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.

The assumptions underlying the forecast of cash available for distribution that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

Our estimate of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast of results of operations and cash available for distribution for the twelve months ending September 30, 2015. The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, the Company’s management. Our independent auditors have neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, our independent auditors do not express an opinion or any other form of assurance with respect thereto. Our independent auditors’ report included in this prospectus relates to the Company’s historical financial information. It does not extend to the prospective financial information and should not be read to do so. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks, including those discussed in this section that could cause actual results to differ materially from those forecasted. If the forecasted results are not achieved, we may not be able to pay the full minimum quarterly distribution or any amount on the common units or subordinated units, in which event the market price of the common units may decline materially. The amount of available cash we need to pay the minimum quarterly distribution for four quarters on the common units, the subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering is $31.5 million. For a forecast of our ability to pay the full minimum quarterly distributions on the common units, the subordinated units and the 2.0% general partner interest for the twelve months ending September 30, 2015, please read “Our Cash Distribution Policy and Restrictions on Distributions” and “Forward-Looking Statements.”

Our initial fleet consists of only four vessels. Any limitation on the availability or operation of those vessels could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our initial fleet consists of only four VLCCs. If any of our vessels is unable to generate revenues for any significant period of time for any reason, including unexpected periods of off-hire or early charter termination (which could result from damage to our vessels), our business, financial condition, results of operations and cash flows, including cash available for distribution to unitholders, could be materially and adversely affected. The impact of any limitation in the operation of our vessels or any early charter termination would be amplified during the period prior to acquisition of additional vessels from Navios Maritime Acquisition, as a substantial portion of our cash flows and income are dependent on the revenues earned by the chartering of our four VLCCs. In addition, the costs of vessel repairs are unpredictable and can be substantial. In the event of repair costs that are not covered by our insurance policies, we may have to pay for such repair costs, which would decrease our earnings and cash flows.

We are focused on employing vessels on long-term charters of at least five years, which may not be typical for the crude oil, refined petroleum product, chemical and LPG sectors of the seaborne transportation industry.

One of our principal strategies is to enter into additional long-term charters of at least five years, which may not be the typical charter length for vessels in our sectors, although we believe it is impractical to determine the typical charter length for vessels in our sectors due to factors such as market dynamics, charter strategy and the private nature of charter agreements. In our experience, charters are generally entered into for time periods of

 

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less than five years, although we are not aware of any empirical evidence that supports this observation. If a market for long-term time charters in the crude oil, refined petroleum product, chemical and LPG tanker sectors does not develop, we may have increased difficulty entering into long-term time charters upon expiration or early termination of the time charters for the VLCCs in our initial fleet or for any vessels that we acquire in the future. As a result, our revenues and cash flows may become more volatile. In addition, an active short-term or spot charter market may require us to enter into charters based on changing market prices, as opposed to contracts based on fixed rates, which could result in a decrease in our revenues and cash flows, including cash available for distribution to unitholders, if we enter into charters during periods when the market price for shipping crude oil, refined petroleum product, chemical and LPG is depressed.

Due to our lack of diversification, adverse developments in the tanker industry could adversely affect our business, particularly if such developments occur at a time when we are seeking a new charter.

Due to our lack of diversification, an adverse development in the tanker industry could have a significantly greater impact on our business, particularly if such developments occur at a time when our ships are not under charter or nearing the end of their charters, than if we maintained more diverse assets or lines of businesses.

We depend on two customers for our revenue. Charterers may terminate or default on their obligations to us, which could materially adversely affect our results of operations and cash flow, and cash available for distribution to unitholders and breaches of the charters may be difficult to enforce.

We derive our revenue from two charterers. For the nine month period ended September 30, 2014, Cosco Dalian and Formosa Petrochemical accounted for 77.9% and 22.1%, respectively, of our total revenue. The loss of these customers, a customer’s failure to make payments or perform under any of the applicable charters, a customer’s poor financial performance, a customer’s termination of any of the applicable charters, the loss or damage beyond repair to any of our vessels, our failure to deliver the vessel within a fixed period of time or a decline in payments under the charters could have a material adverse effect on our business, results of operations and financial condition. In addition, the charterers of the VLCC vessels are based in, and have their primary assets and operations in, the Asia-Pacific region, including the People’s Republic of China. The charter agreements for the VLCC vessels are governed by English law and provide for dispute resolution in English courts or London-based arbitral proceedings. There can be no assurance that we would be able to enforce any judgments against these charterers in jurisdictions where they are based or have their primary assets and operations. Even after a charter contract is entered, charterers may terminate charters early under certain circumstances. The events or occurrences that will cause a charter to terminate or give the charterer the option to terminate the charter generally include a total or constructive total loss of the related vessel, the requisition for hire of the related vessel, the vessel becoming subject to seizure for more than a specified number of days or the failure of the related vessel to meet specified performance criteria. In addition, the ability of a charterer to perform its obligations under a charter will depend on a number of factors that are beyond our control.

These factors may include general economic conditions, the condition of the crude oil, product and chemical tanker sectors of the shipping industry, the charter rates received for specific types of vessels and various operating expenses. The costs and delays associated with the default by a charterer of a vessel may be considerable and may adversely affect our business, results of operations, cash flows and financial condition.

We cannot predict whether our charterers will, upon the expiration of their charters, re-charter our vessels on favorable terms or at all. If our charterers decide not to re-charter our vessels, we may not be able to re-charter them on terms similar to our current charters or at all. In the future, we may also employ our vessels on the spot charter market, which is subject to greater rate fluctuation than the time charter market. If we receive lower charter rates under replacement charters or are unable to re-charter all of our vessels, our results of operations and financial condition and cash available for distribution to unitholders could be materially adversely affected.

 

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Charter rates in the crude oil, product and chemical tanker sectors of the seaborne transportation industry in which we operate have significantly declined from historically high levels in 2008 and may remain depressed or decline further in the future, which may adversely affect our earnings.

Charter rates in the crude oil, product and chemical tanker sectors have significantly declined from historically high levels in 2008 and may remain depressed or decline further. For example, the Baltic Dirty Tanker Index declined from a high of 2,347 in July 2008 to 453 in mid-April 2009, which represents a decline of approximately 81%. Since January 2013, it has traded between a low of 577 and a high of 1,344; as of September 16, 2014, it stood at 630. The Baltic Clean Tanker Index fell from 1,509 in the early summer of 2008 to 345 in April 2009, or approximately 77%. It has traded between a low of 483 and a high of 729 since January 2013 and stood at 554 as of September 16, 2014. Of note is that Chinese imports of crude oil have steadily increased from 3 million barrels per day in 2008 to about 6.0 million barrels per day in August 2014 and the US has steadily increased its total petroleum product exports by about 265% to 3.8 million barrels per day in June 2014 from 1 million barrels per day in January 2006. If the tanker sector of the seaborne transportation industry, which has been highly cyclical, is depressed in the future at a time when we may want to sell a vessel, our earnings and available cash flow may be adversely affected. We cannot assure you that we will be able to successfully charter our vessels in the future at rates sufficient to allow us to operate our business profitably or to meet our obligations, including payment of debt service to our lenders. Our ability to renew the charters on vessels that we may acquire in the future, the charter rates payable under any replacement charters and vessel values will depend upon, among other things, economic conditions in the sector in which our vessels operate at that time, changes in the supply and demand for vessel capacity and changes in the supply and demand for the seaborne transportation of energy resources and commodities.

The cyclical nature of the tanker industry may lead to volatility in charter rates and vessel values, which could adversely affect our future earnings.

Oil has been one of the world’s primary energy sources for a number of decades. The global economic growth of previous years had a significant impact on the demand for oil and subsequently on the oil trade and shipping demand. However, from the second half of 2008 until recently the world’s economies experienced a major economic slowdown and uncertainty remains with respect to the ongoing recovery, the sustainability of which is very difficult to forecast and is expected to continue to have a significant impact on world trade, including the oil trade. If the tanker market, which has historically been cyclical, is depressed in the future, our earnings and available cash flow may be materially adversely affected. Our ability to employ our vessels profitably will depend upon, among other things, economic conditions in the tanker market. Fluctuations in charter rates and tanker values result from changes in the supply and demand for tanker capacity and changes in the supply and demand for liquid cargoes, including petroleum and petroleum products.

Historically, the crude oil markets have been volatile as a result of the many conditions and events that can affect the price, demand, production and transport of oil, including competition from alternative energy sources. Decreased demand for oil transportation may have a material adverse effect on our revenues, cash flows and profitability. The factors affecting the supply and demand for tankers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable. The current global financial crisis has intensified this unpredictability.

The factors that influence demand for tanker capacity include:

 

    demand for and supply of liquid cargoes, including petroleum and petroleum products;

 

    developments in international trade;

 

    waiting days in ports;

 

    changes in oil production and refining capacity and regional availability of petroleum refining capacity;

 

    environmental and other regulatory developments;

 

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    global and regional economic conditions;

 

    the distance chemicals, petroleum and petroleum products are to be moved by sea;

 

    changes in seaborne and other transportation patterns, including changes in distances over which cargo is transported due to geographic changes in where oil is produced, refined and used;

 

    competition from alternative sources of energy;

 

    armed conflicts and terrorist activities;

 

    political developments; and

 

    embargoes and strikes.

The factors that influence the supply of tanker capacity include:

 

    the number of newbuilding deliveries;

 

    the scrapping rate of older vessels;

 

    port or canal congestion;

 

    the number of vessels that are used for storage or as floating storage offloading service vessels;

 

    the conversion of tankers to other uses, including conversion of vessels from transporting oil and oil products to carrying drybulk cargo and the reverse conversion;

 

    availability of financing for new tankers;

 

    the phasing out of single-hull tankers due to legislation and environmental concerns;

 

    the price of steel;

 

    the number of vessels that are out of service;

 

    national or international regulations that may effectively cause reductions in the carrying capacity of vessels or early obsolescence of tonnage; and

 

    environmental concerns and regulations.

Historically, the tanker markets have been volatile as a result of the many conditions and factors that can affect the price, supply and demand for tanker capacity. The recent global economic crisis may further reduce demand for transportation of oil over long distances and supply of tankers that carry oil, which may materially affect our future revenues, profitability and cash flows.

We believe that the current order book for tanker vessels represents a significant percentage of the existing fleet; however the percentage of the total tanker fleet on order as a percent of the total fleet declined from nearly 50% at its recent peak in 2008 to 13.8% as of July 2014. An over-supply of tanker capacity may result in a reduction of charter hire rates. If a reduction in charter rates occurs, we may only be able to charter our vessels at unprofitable rates or we may not be able to charter these vessels at all, which could lead to a material adverse effect on our results of operations.

The market values of our vessels or vessels we may acquire have declined from historically high levels and may fluctuate significantly, which could cause us to breach covenants in our debt instruments, result in the foreclosure of certain of our vessels, limit the amount of funds that we can borrow and adversely affect our ability to purchase new vessels and our operating results. Depressed vessel values could also cause us to incur impairment charges.

Due to the sharp decline in world trade and tanker charter rates, the market values of our vessels and of tankers generally, are currently significantly lower than they would have been prior to the downturn in the second

 

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half of 2008. Within the past year smaller product tanker yard resale prices have remained flat or increased slightly. Vessel values may remain at current low, or lower, levels for a prolonged period of time and can fluctuate substantially over time due to a number of different factors, including:

 

    prevailing level of charter rates;

 

    general economic and market conditions affecting the shipping industry;

 

    competition from other shipping companies;

 

    types and sizes of vessels;

 

    supply and demand for vessels;

 

    other modes of transportation;

 

    cost of newbuildings;

 

    governmental or other regulations; and

 

    technological advances.

If the market value of our vessels decreases, we may breach some of the covenants contained in the financing agreements relating to our indebtedness at the time. If we breach any such covenants in the future and we are unable to remedy the relevant breach, our lenders could accelerate or require us to prepay a portion of our debt and foreclose on our vessels. In addition, if the book value of a vessel is impaired due to unfavorable market conditions, we would incur a loss that could have a material adverse effect on our business, financial condition and results of operations.

In addition, as vessels grow older, they generally decline in value. We will review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review certain indicators of potential impairment, such as undiscounted projected operating cash flows expected from the future operation of the vessels, which can be volatile for vessels employed on short-term charters or in the spot market. Any impairment charges incurred as a result of declines in charter rates would negatively affect our financial condition and results of operations. In addition, if we sell any vessel at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel’s carrying amount on our financial statements, resulting in a loss and a reduction in earnings. Conversely, if vessel values are elevated at a time when we wish to acquire additional vessels, the cost of acquisition may increase and this could materially adversely affect our business, financial condition and results of operations.

Our ability to grow and to meet our financial needs may be adversely affected by our cash distribution policy.

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash (as defined in our partnership agreement) each quarter. Accordingly, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations.

In determining the amount of cash available for distribution, our board of directors approves the amount of cash reserves to set aside, including reserves for future maintenance and replacement capital expenditures, working capital and other matters. We also rely upon external financing sources, including commercial borrowings, to fund our capital expenditures. Accordingly, to the extent we do not have sufficient cash reserves or are unable to obtain financing, our cash distribution policy may significantly impair our ability to meet our financial needs or to grow.

 

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We must make substantial capital expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution. In addition, each quarter our board of directors is required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.

We must make substantial capital expenditures to maintain, over the long term, the operating capacity of our fleet. These maintenance and replacement capital expenditures include capital expenditures associated with drydocking a vessel, modifying an existing vessel or acquiring a new vessel to the extent these expenditures are incurred to maintain the operating capacity of our fleet. These expenditures could increase as a result of changes in:

 

    the cost of our labor and materials;

 

    the cost of suitable replacement vessels;

 

    customer/market requirements;

 

    increases in the size of our fleet; and

 

    governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment.

Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and Uses.”

Our significant maintenance and replacement capital expenditures will reduce the amount of cash we have available for distribution to our unitholders. Any costs associated with scheduled drydocking will be paid to the Manager at cost under a management agreement. The initial term of the management agreement will be five years from the closing of this offering and this fee will be fixed for the first two years of that agreement. During the remaining three years of the term of the management agreement, we expect that we will reimburse the manager for all of the actual operating costs and expenses it incurs in connection with the management of our fleet.

Our partnership agreement requires our board of directors to deduct estimated, rather than actual, maintenance and replacement capital expenditures from operating surplus each quarter in an effort to reduce fluctuations in operating surplus. The amount of estimated capital expenditures deducted from operating surplus is subject to review and change by the conflicts committee at least once a year. If our board of directors underestimates the appropriate level of estimated maintenance and replacement capital expenditures, we may have less cash available for distribution in future periods when actual capital expenditures begin to exceed previous estimates.

Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities and paying distributions to our unitholders.

Upon the closing of this offering, we will enter into a new credit facility which will provide us with the ability to borrow up to $126.0 million, of which we expect $126.0 million will be outstanding after the closing of this offering. There can be no assurance we will be able to obtain such financing. Following this offering, we will continue to have the ability to incur additional debt, subject to limitations in our new credit facility. Our level of debt could have important consequences to us, including the following:

 

    our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

    we will need a substantial portion of our cash flow to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;

 

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    our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally;

 

    our debt level may limit our flexibility in responding to changing business and economic conditions; and

 

    our debt level may limit our ability to pay distributions to our unitholders.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

The new credit facility that we will enter into in connection with this offering contains restrictive covenants, which may limit our business and financing activities.

The operating and financial restrictions and covenants in the new credit facility that we will enter into upon the closing of this offering and any future credit facility could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities.

Upon the closing of this offering, we will enter into a new credit facility which contains a covenant that Navios Maritime Acquisition and/or Navios Maritime Holdings must own in the aggregate 100% of our general partner. The new credit facility also contains a covenant that Ms. Frangou will at all times hold the position of our Chairman of the Board and Chief Executive Officer. Our ability to comply with the covenants and restrictions that will be contained in our new credit facility and any other debt instruments we may enter into in the future may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we are in breach of any of the restrictions, covenants, ratios or tests in our new credit facility, especially if we trigger a cross default currently contained in certain of our loan agreements, a significant portion of our obligations may become immediately due and payable, and our lenders’ commitment to make further loans to us may terminate. We may not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, our obligations under the new credit facility will be secured by certain of our vessels, and if we are unable to repay borrowings under such credit facility, lenders could seek to foreclose on those vessels.

Restrictions in our debt agreements may prevent us from paying distributions.

Our payment of principal and interest on the debt will reduce cash available for distribution on our units. In addition, our new credit facility prohibits the payment of distributions if we are not in compliance with certain financial covenants or upon the occurrence of an event of default.

We anticipate that any subsequent refinancing of our current debt or any new debt will have similar restrictions. For more information regarding our financing arrangements, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The initial public offering price for the common units and the total consideration to be paid to Navios Maritime Acquisition for the interests in the entities that own the vessels in our initial fleet was determined by negotiations among us and the representatives of the underwriters.

There has been no public trading market for our common units prior to this offering. As a result, the initial public offering price for our common units was determined through negotiations among us and the representatives of the underwriters. In addition, the total consideration to Navios Maritime Acquisition in the

 

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form of common units, subordinated units, the 2.0% general partner interest, incentive distribution rights, and cash for the interests in the entities that own the vessels in our initial fleet was dependent on the initial public offering price. We did not obtain an independent third-party valuation regarding the total value of the interests in the entities that own the vessels in our initial fleet. In negotiating the initial public offering price for our common units, the underwriters and Navios Maritime Acquisition may have had interests which differ from the interests of our unitholders. Accordingly, the initial public offering price may be different than the price that would have been determined based on an independent third-party valuation regarding the value of our initial fleet, or the market price of the common units that will prevail in the trading market. Please read “Use of Proceeds,” “Conflicts of Interest and Fiduciary Duties” and “Underwriting.”

We depend on Navios Maritime Holdings, Navios Maritime Acquisition and their affiliates to assist us in operating and expanding our business.

Pursuant to a management agreement between us and the Manager, the Manager will provide to us significant commercial and technical management services (including the commercial and technical management of our vessels, vessel maintenance and crewing, purchasing and insurance and shipyard supervision). Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Management Agreement.” In addition, pursuant to an administrative services agreement between us and the Manager, the Manager will provide to us significant administrative, financial and other support services. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Administrative Services Agreement.” Our operational success and ability to execute our growth strategy will depend significantly upon the Manager’s satisfactory performance of these services. Our business will be harmed if the Manager fails to perform these services satisfactorily, if the Manager cancels either of these agreements, or if the Manager stops providing these services to us. We may also in the future contract with Navios Maritime Holdings or Navios Maritime Acquisition for it to have newbuildings constructed on our behalf and to incur the construction-related financing. We would purchase the vessels on or after delivery based on an agreed-upon price.

Our ability to enter into new charters and expand our customer relationships will depend largely on our ability to leverage our relationship with Navios Maritime Holdings, Navios Maritime Acquisition and their reputations and relationships in the shipping industry. If Navios Maritime Holdings or Navios Maritime Acquisition suffer material damage to their reputations or relationships, it may harm our ability to:

 

    renew existing charters upon their expiration;

 

    obtain new charters;

 

    successfully interact with shipyards during periods of shipyard construction constraints;

 

    obtain financing on commercially acceptable terms; or

 

    maintain satisfactory relationships with suppliers and other third parties.

If our ability to do any of the things described above is impaired, it could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

If we fail to manage our planned growth properly, we may not be able to expand our fleet successfully, which may adversely affect our overall financial position.

In addition to our two-year option to purchase seven additional VLCCs from Navios Maritime Acquisition and our option to purchase additional vessels from Navios Maritime Acquisition if they are placed under charters of five years or more, we intend to continue to expand our fleet in the future. Our growth will depend on:

 

    locating and acquiring suitable vessels;

 

    identifying reputable shipyards with available capacity and contracting with them for the construction of new vessels;

 

    integrating any acquired vessels successfully with our existing operations;

 

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    enhancing our customer base;

 

    managing our expansion; and

 

    obtaining required financing, which could include debt, equity or combinations thereof.

Additionally, the marine transportation and logistics industries are capital intensive, traditionally using substantial amounts of indebtedness to finance vessel acquisitions, capital expenditures and working capital needs. If we finance the purchase of our vessels through the issuance of debt securities, it could result in:

 

    default and foreclosure on our assets if our operating cash flow after a business combination or asset acquisition were insufficient to pay our debt obligations;

 

    acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant;

 

    our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and

 

    our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding.

In addition, our business plan and strategy is predicated on buying vessels in a distressed market at what we believe is near the low end of the cycle in what has typically been a cyclical industry. However, there is no assurance that charter rates and vessels asset values will not sink lower, or that there will be an upswing in shipping costs or vessel asset values in the near-term or at all, in which case our business plan and strategy may not succeed in the near-term or at all. Growing any business by acquisition presents numerous risks such as undisclosed liabilities and obligations, difficulty experienced in obtaining additional qualified personnel and managing relationships with customers and suppliers and integrating newly acquired operations into existing infrastructures. We may not be successful in growing and may incur significant expenses and losses.

Our future capital needs are uncertain and we may need to raise additional funds in the future.

In the future, we may need to raise additional capital to maintain, replace and expand the operating capacity of our fleet and fund our operations. Among other things, we hold options to acquire seven VLCCs from Navios Maritime Acquisition at fair market value and we do not currently have financing sources in place to fund the acquisition of these vessels. Our future funding requirements will depend on many factors, including the cost and timing of vessel acquisitions, and the cost of retrofitting or modifying existing ships as a result of technological advances in ship design or equipment, changes in applicable environmental or other regulations or standards, customer requirements or otherwise.

We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our unitholders may experience dilution or reduced distributions per unit. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt or pay distributions. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our unitholders. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our fleet expansion plans. Any of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for distributions to our unitholders.

 

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Our growth depends on continued growth in demand for crude oil, refined petroleum products, liquified petroleum gas and bulk liquid chemicals and the continued demand for seaborne transportation of such cargoes.

Our growth strategy focuses on expansion in the crude oil, refined petroleum product, chemical tanker and LPG sectors. Accordingly, our growth depends on continued growth in world and regional demand for crude oil, refined petroleum products, LPG and bulk liquid chemicals and the transportation of such cargoes by sea, which could be negatively affected by a number of factors, including:

 

    the economic and financial developments globally, including actual and projected global economic growth;

 

    fluctuations in the actual or projected price of crude oil, refined petroleum products or bulk liquid chemicals;

 

    refining capacity and its geographical location;

 

    increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;

 

    decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil less attractive or energy conservation measures;

 

    availability of new, alternative energy sources; and

 

    negative or deteriorating global or regional economic or political conditions, particularly in oil-consuming regions, which could reduce energy consumption or its growth.

The refining and chemical industries may respond to any economic downturn and demand weakness by reducing operating rates partially or completely closing refineries and by reducing or cancelling certain investment expansion plans, including plans for additional refining capacity, in the case of the refining industry. Continued reduced demand for crude oil, refined petroleum products, LPG and bulk liquid chemicals and the shipping of such cargoes or the increased availability of pipelines used to transport crude oil, refined petroleum products, LPG and bulk liquid chemicals would have a material adverse effect on our future growth and could harm our business, results of operations and financial condition.

Our growth depends on our ability to obtain customers, for which we face substantial competition. In the highly competitive tanker industry, we may not be able to compete for charters with new entrants or established companies with greater resources, which may adversely affect our results of operations.

We will employ our tanker vessels in the highly competitive crude oil, product, chemical and LPG tanker sectors of the shipping industry that is capital intensive and fragmented. Competition arises primarily from other vessel owners, including major oil companies and traders as well as independent tanker companies, some of whom have substantially greater resources and experience than us. Competition for the chartering of tankers can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers. Such competition has been enhanced as a result of the downturn in the shipping industry, which has resulted in an excess supply of vessels and reduced charter rates.

Long-term time charters have the potential to provide income at pre-determined rates over more extended periods of time. However, the process for obtaining longer term time charters is highly competitive and generally involves a lengthy, intensive and continuous screening and vetting process and the submission of competitive bids that often extends for several months. In addition to the quality, age and suitability of the vessel, longer term shipping contracts tend to be awarded based upon a variety of other factors relating to the vessel operator. Competition for the transportation of crude oil, refined petroleum products, LPG and bulk liquid chemicals can be intense and depends on price, location, size, age, condition and acceptability of the vessel and our managers to the charterers.

 

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In addition to having to meet the stringent requirements set out by charterers, it is likely that we will also face substantial competition from a number of competitors who may have greater financial resources, stronger reputations or experience than we do when we try to re-charter our vessels. It is also likely that we will face increased numbers of competitors entering into the crude oil, refined petroleum product, LPG and chemical tanker sectors, including in the ice class sector. Increased competition may cause greater price competition, especially for long-term charters. Due in part to the highly fragmented markets, competitors with greater resources could operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets than ours.

As a result of these factors, we may be unable to obtain customers for long-term time charters on a profitable basis, if at all. Even if we are successful in employing our vessels under longer term time charters, our vessels will not be available for trading in the spot market during an upturn in the crude oil, refined petroleum product, LPG and chemical tanker market cycles, when spot trading may be more profitable. If we cannot successfully employ our vessels in profitable time charters our results of operations and operating cash flow could be adversely affected.

Delays in deliveries of any future newbuild vessels, or our decision to cancel, or our inability to otherwise complete the acquisitions of any newbuildings we may decide to acquire in the future, could harm our operating results and lead to the termination of any related charters.

Any newbuildings we may contract to acquire or order in the future, could be delayed, not completed or cancelled, which would delay or eliminate our expected receipt of revenues under any charters for such vessels. The shipbuilder or third party seller could fail to deliver the newbuilding vessel or any other vessels we acquire or order, or we could cancel a purchase or a newbuilding contract because the shipbuilder has not met its obligations, including its obligation to maintain agreed refund guarantees in place for our benefit. For prolonged delays, the customer may terminate the time charter.

Our receipt of newbuildings could be delayed, canceled, or otherwise not completed because of:

 

    quality or engineering problems or failure to deliver the vessel in accordance with the vessel specifications;

 

    changes in governmental regulations or maritime self-regulatory organization standards;

 

    work stoppages or other labor disturbances at the shipyard;

 

    bankruptcy or other financial or liquidity problems of the shipbuilder;

 

    a backlog of orders at the shipyard;

 

    political or economic disturbances in the country or region where the vessel is being built;

 

    weather interference or catastrophic event, such as a major earthquake or fire;

 

    the shipbuilder failing to deliver the vessel in accordance with our vessel specifications;

 

    our requests for changes to the original vessel specifications;

 

    shortages of or delays in the receipt of necessary construction materials, such as steel; or

 

    our inability to finance the purchase of the vessel.

If delivery of any newbuild vessel acquired, or any vessel we contract to acquire in the future is materially delayed, it could materially adversely affect our results of operations and financial condition.

All of the vessels we have acquired are second-hand vessels, and we may acquire more second-hand vessels in the future. The acquisition and operation of such vessels may result in increased operating costs and vessel off-hire, which could materially adversely affect our earnings.

All of our VLCCs that we have acquired are second-hand vessels, and we may acquire more second-hand vessels in the future. Our inspection of second-hand vessels prior to purchase does not provide us with the

 

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same knowledge about their condition and cost of any required or anticipated repairs that we would have had if these vessels had been built for and operated exclusively by us. Generally, we will not receive the benefit of warranties on second-hand vessels.

In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Due to improvements in engine technology, older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

Governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage or the geographic regions in which we may operate. We cannot predict what alterations or modifications our vessels may be required to undergo in the future. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

Although we have considered the age and condition of the vessels in budgeting for operating, insurance and maintenance costs, we may encounter higher operating and maintenance costs due to the age and condition of these vessels, or any additional vessels we acquire in the future. The age of some of the VLCCs may result in higher operating costs and increased vessel off-hire periods relative to our competitors that operate newer fleets, which could have a material adverse effect on our results of operations.

Spot market rates for tanker vessels are highly volatile and are currently at relatively low levels historically and may further decrease in the future, which may materially adversely affect our earnings in the event that our vessels are chartered in the spot market.

We may deploy some of our VLCCs or future refined petroleum product tankers, LPG tankers and chemical tankers from time to time in the spot market. Although spot chartering is common in the refined petroleum product, chemical, LPG and crude oil sectors, refined petroleum product, chemical and LPG tanker and VLCCs’ charter hire rates are highly volatile and may fluctuate significantly based upon demand for seaborne transportation of crude oil, refined petroleum product, LPG and chemical, as well as tanker supply. The world oil demand is influenced by many factors, including international economic activity; geographic changes in oil production, processing, and consumption; oil price levels; inventory policies of the major oil and oil trading companies; and strategic inventory policies of countries such as the United States and China. Any successful operation of our vessels in the spot charter market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. Furthermore, as charter rates for spot charters are fixed for a single voyage that may last up to several weeks, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases.

The spot market is highly volatile, and, in the past, there have been periods when spot rates have declined below the operating cost of vessels. Currently, charter hire rates are at relatively low rates historically and there is no assurance that the crude oil, refined petroleum product, LPG and chemical tanker charter market will recover over the next several months or will not continue to decline further.

Additionally, if the spot market rates or short-term time charter rates become significantly lower than the time charter equivalent rates that some of our charterers are obligated to pay us under our existing charters, the charterers may have incentive to default under that charter or attempt to renegotiate the charter. If our charterers fail to pay their obligations, we would have to attempt to re-charter our vessels at lower charter rates, which would affect our ability to comply with our loan covenants and operate our vessels profitably. If we are not able to comply with our loan covenants and our lenders choose to accelerate our indebtedness and foreclose their liens, we could be required to sell vessels in our fleet and our ability to continue to conduct our business would be impaired.

 

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Our initial fleet of VLCCs is contractually committed to time charters, with the remaining terms of these charters expiring during the period from and including January 2017 through June 2026. We are not permitted to unilaterally terminate the charter agreements of the VLCCs due to upswings in the tanker industry cycle, when spot market voyages might be more profitable. We may also decide to sell a vessel in the future. In such a case, should we sell a vessel that is committed to a long-term charter, we may not be able to realize the full charter free fair market value of the vessel during a period when spot market charters are more profitable than the charter agreement under which the vessel operates. We may re-charter the VLCCs on long-term charters or charter them in the spot market or place them in pools upon expiration or termination of the vessels’ current charters. If we are not able to employ the VLCCs profitably under time charters or in the spot market, our results of operations and operating cash flow may suffer.

Any decrease in shipments of crude oil from the Arabian Gulf or West Africa may materially adversely affect our financial performance.

The demand for VLCC oil tankers derives primarily from demand for Arabian Gulf and West African crude oil, which, in turn, primarily depends on the economies of the world’s industrial countries and competition from alternative energy sources. A wide range of economic, social and other factors can significantly affect the strength of the world’s industrial economies and their demand for Arabian Gulf and West African crude oil.

Among the factors that could lead to a decrease in demand for exported Arabian Gulf and West African crude oil are:

 

    increased use of existing and future crude oil pipelines in the Arabian Gulf or West African regions;

 

    a decision by the Organization of the Petroleum Exporting Countries (“OPEC”) to increase its crude oil prices or to further decrease or limit their crude oil production;

 

    armed conflict or acts of piracy in the Arabian Gulf or West Africa and political or other factors;

 

    increased oil production in other regions, such as the United States, Russia and Latin America; and

 

    the development and the relative costs of nuclear power, natural gas, coal and other alternative sources of energy.

Any significant decrease in shipments of crude oil from the Arabian Gulf or West Africa may materially adversely affect our financial performance.

We may face unexpected maintenance costs, which could materially adversely affect our business, financial condition and results of operations.

If our vessels suffer damage or require upgrade work, they may need to be repaired at a drydocking facility. Our vessels may occasionally require upgrade work in order to maintain their classification society rating or as a result of changes in regulatory requirements. In addition, our vessels will be off-hire periodically for intermediate surveys and special surveys in connection with each vessel’s certification by its classification society. The costs of drydock repairs are unpredictable and can be substantial and the loss of earnings while these vessels are being repaired and reconditioned, as well as the actual cost of these repairs, would decrease our earnings. Our insurance generally only covers a portion of drydocking expenses resulting from damage to a vessel and expenses related to maintenance of a vessel will not be reimbursed. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located. We may be unable to find space at a suitable drydocking facility on a timely basis or may be forced to move a damaged vessel to a drydocking facility that is not conveniently located to the vessel’s position. The loss of earnings while any of our vessels are forced to wait for space or to relocate to drydocking facilities that are far away from the routes on which our vessels trade would further decrease our earnings.

 

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Our vessels may be subject to unbudgeted periods of off-hire, which could materially adversely affect our business, financial condition and results of operations.

Under the terms of the charter agreements under which our vessels operate, when a vessel is “off-hire,” or not available for service or otherwise deficient in its condition or performance, the charterer generally is not required to pay the hire rate, and we will be responsible for all costs (including the cost of bunker fuel) unless the charterer is responsible for the circumstances giving rise to the lack of availability. A vessel generally will be deemed to be off-hire if there is an occurrence preventing the full working of the vessel due to, among other things:

 

    operational deficiencies;

 

    the removal of a vessel from the water for repairs, maintenance or inspection, which is referred to as drydocking;

 

    equipment breakdowns;

 

    delays due to accidents or deviations from course;

 

    occurrence of hostilities in the vessel’s flag state or in the event of piracy;

 

    crewing strikes, labor boycotts, certain vessel detentions or similar problems; or

 

    our failure to maintain the vessel in compliance with its specifications, contractual standards and applicable country of registry and international regulations or to provide the required crew.

Under our charters, the charterer is permitted to terminate the time charter if the vessel is off-hire for an extended period, such period ranging from 7 to 180 consecutive off-hire days.

Future increases in vessel operating expenses, including rising fuel prices, could materially adversely affect our business, financial condition and results of operations.

Under our time charter agreements, the charterer is responsible for substantially all of the voyage expenses, including port and canal charges and fuel costs and we are generally responsible for vessel operating expenses. Vessel operating expenses are the costs of operating a vessel, primarily consisting of crew wages and associated costs, insurance premiums, management fees, lubricants and spare parts and repair and maintenance costs. In particular, the cost of fuel is a significant factor in negotiating charter rates. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil, actions by members of OPEC and other oil and gas producers, war, terrorism and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations.

We receive a daily rate for the use of our vessels, which is fixed through the term of the applicable charter agreement. Our charter agreements do not provide for any increase in the daily hire rate in the event that vessel-operating expenses increase during the term of the charter agreement. The charter agreements for our initial fleet of VLCCs expire during the period from and including January 2017 through June 2026. Because of the long-term nature of these charter agreements, incremental increases in our vessel operating expenses over the term of a charter agreement will effectively reduce our operating income and, if such increases in operating expenses are significant, materially adversely affect our business, financial condition and results of operations.

The crude oil, refined petroleum product, LPG and chemical tanker sectors are subject to seasonal fluctuations in demand and, therefore, may cause volatility in our operating results upon the re-delivery of our vessels from fixed charter.

The crude oil, refined petroleum product, LPG and chemical tanker sectors of the shipping industry have historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results. The refined petroleum product and chemical tanker markets are typically stronger in the fall and winter months in anticipation of increased consumption of oil and natural gas in the northern hemisphere. In addition, unpredictable weather patterns in these months tend to

 

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disrupt vessel scheduling and supplies of certain commodities. As a result, revenues are typically weaker during the fiscal quarters ended June 30 and September 30, and, conversely, typically stronger in fiscal quarters ended December 31 and March 31. Our operating results, therefore, are subject to seasonal fluctuations.

We may enter into the LPG shipping market in the future, which is a highly competitive and cyclical market.

Currently, our fleet does not contain any LPG tankers. However, we may enter into the LPG shipping market in the future. The Navios Group does not have experience in the LPG shipping market and therefore we may not be successful. Competition in the operation of LPG carriers is intense. We anticipate that an increasing number of maritime transport companies, including many with strong reputations and extensive resources and experience, will enter the LPG shipping market. Potential competitors may have significantly greater financial resources than we do. Competition for the transportation of LPG depends on the price, location, size, age, condition and acceptability of the vessel to the charterer. Further, competitors with greater resources may have larger fleets, or could operate larger fleets through consolidations, acquisitions, newbuildings or pooling of their vessels with other companies, and, therefore, may be able to offer a more competitive service than us, including better charter rates. As a result, we may be unable to obtain customers in the LPG shipping market on a profitable basis, if at all. In addition, historically, the international LPG shipping market has been cyclical with attendant volatility in profitability, charter rates and vessel values. This cyclicality can materially adversely affect our business during the downturns in the market. Our growth depends in part on our ability to succeed in the LPG market which will depend on the growth in the supply and demand for LPG products and LPG shipping, which was materially adversely affected by the sharp decrease in world trade that the global economy experienced in the latter part of 2008 and in 2009. There can be no assurance that the LPG market will be or remain strong when we enter the market.

We are subject to various laws, regulations and conventions, including environmental and safety laws that could require significant expenditures both to maintain compliance with such laws and to pay for any uninsured environmental liabilities including any resulting from a spill or other environmental incident.

The shipping business and vessel operation are materially affected by government regulation in the form of international conventions, national, state and local laws, and regulations in force in the jurisdictions in which vessels operate, as well as in the country or countries of their registration. Governmental regulations, safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations and customer requirements or competition, may require us to make capital and other expenditures. Because such conventions, laws and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions, laws and regulations, or the impact thereof on the fair market price or useful life of our vessels. In order to satisfy any such requirements, we may be required to take any of our vessels out of service for extended periods of time, with corresponding losses of revenues. In the future, market conditions may not justify these expenditures or enable us to operate our vessels, particularly older vessels, profitably during the remainder of their economic lives. This could lead to significant asset write downs. In addition, violations of environmental and safety regulations can result in substantial penalties and, in certain instances, seizure or detention of our vessels.

Additional conventions, laws and regulations may be adopted that could limit our ability to do business, require capital expenditures or otherwise increase our cost of doing business, which may materially adversely affect our operations, as well as the shipping industry generally. For example, in various jurisdictions legislation has been enacted, or is under consideration, that would impose more stringent requirements on air pollution and water discharges from our vessels. For example, the International Maritime Organization (“IMO”) periodically proposes and adopts amendments to revise the International Convention for the Prevention of Pollution from Ships (“MARPOL”), such as the revision to Annex VI which came into force on July 1, 2010. The revised Annex VI implements a phased reduction of the sulfur content of fuel and allows for stricter sulfur limits in designated emission control areas (“ECAs”). Thus far, ECAs have been formally adopted for the Baltic Sea area (limits Sox emissions only); the North Sea area including the English Channel (limiting SOx emissions only) and the North

 

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American ECA (which came into effect from August 1, 2012 limiting SOx, NOx and particulate matter emissions). The United States Caribbean Sea ECA entered into force on January 1, 2013 and has been effective since January 1, 2014, limiting SOx, NOx and particulate matter emissions.

California has adopted more stringent low sulfur fuel requirements within California-regulated waters. In addition, the IMO, the U.S. and states within the U.S. have proposed or implemented requirements relating to the management of ballast water to prevent the harmful effects of foreign invasive species.

The operation of vessels is also affected by the requirements set forth in the International Safety Management (“ISM”) Code. The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe vessel operation and describing procedures for dealing with emergencies. Further to this, the IMO has introduced the first ever mandatory measures for an international greenhouse gas reduction regime for a global industry sector. The Energy Efficiency measures took effect on January 1, 2013 and apply to all ships of 400 gross tonnage and above. They include the development of a ship energy efficiency management plan (“SEEMP”) which is akin to a safety management plan, which the industry will have to comply with. The failure of a ship owner or bareboat charterer to comply with the ISM Code and IMO measures may subject such party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports.

We will seek to operate a fleet of crude, product, chemical and LPG tankers that are subject to national and international laws governing pollution from such vessels. Several international conventions impose and limit pollution liability from vessels. An owner of a tanker vessel carrying a cargo of “persistent oil” as defined by the International Convention for Civil Liability for Oil Pollution Damage (the “CLC”) is subject under the convention to strict liability for any pollution damage caused in a contracting state by an escape or discharge from cargo or bunker tanks. This liability is subject to a financial limit calculated by reference to the tonnage of the ship, and the right to limit liability may be lost if the spill is caused by the shipowner’s intentional or reckless conduct. Liability may also be incurred under the CLC for a bunker spill from the vessel even when she is not carrying such cargo, but is in ballast.

When a tanker is carrying clean oil products that do not constitute “persistent oil” that would be covered under the CLC, liability for any pollution damage will generally fall outside the CLC and will depend on other international conventions or domestic laws in the jurisdiction where the spillage occurs. The same principle applies to any pollution from the vessel in a jurisdiction which is not a party to the CLC. The CLC applies in over 100 jurisdictions around the world, but it does not apply in the United States, where the corresponding liability laws such as the Oil Pollution Act of 1990 (the “OPA”) discussed below, are particularly stringent.

For vessel operations not covered by the CLC, including those operated under our fleet, at present, international liability for oil pollution is governed by the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”). In 2001, the IMO adopted the Bunker Convention, which imposes strict liability on shipowners for pollution damage and response costs incurred in contracting states caused by discharges, or threatened discharges, of bunker oil from all classes of ships not covered by the CLC. The Bunker Convention also requires registered owners of ships over a certain size to maintain insurance to cover their liability for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime, including liability limits calculated in accordance with the Convention on Limitation of Liability for Maritime Claims 1976, as amended (the “1976 Convention”), discussed in more detail in the following paragraph. The Bunker Convention became effective in contracting states on November 21, 2008 and, as of February 28, 2014, had 74 contracting states comprising approximately 90.72% of the gross tonnage of the world’s merchant fleet. In non-contracting states, liability for such bunker oil pollution typically is determined by the national or other domestic laws in the jurisdiction where the spillage occurs.

The CLC and Bunker Convention also provide vessel owners a right to limit their liability, depending on the applicable national or international regime. The CLC includes its own liability limits. The 1976 Convention is the

 

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most widely applicable international regime limiting maritime pollution liability. Rights to limit liability under the 1976 Convention are forfeited where a spill is caused by a shipowner’s intentional or reckless conduct. Certain jurisdictions have ratified the IMO’s Protocol of 1996 to the 1976 Convention, referred to herein as the “Protocol of 1996.” The Protocol of 1996 provides for substantially higher liability limits in those jurisdictions than the limits set forth in the 1976 Convention. Finally, some jurisdictions, such as the United States, are not a party to either the 1976 Convention or the Protocol of 1996, and, therefore, a shipowner’s rights to limit liability for maritime pollution in such jurisdictions may be uncertain.

Environmental legislation in the United States merits particular mention as it is in many respects more onerous than international laws, representing a high-water mark of regulation with which ship owners and operators must comply, and of liability likely to be incurred in the event of non-compliance or an incident causing pollution. Such regulation may become even stricter if laws are changed as a result of the April 2010 Deepwater Horizon oil spill in the Gulf of Mexico. In the United States, the OPA establishes an extensive regulatory and liability regime for the protection and cleanup of the environment from cargo and bunker oil spills from vessels, including tankers. The OPA covers all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its 200 nautical mile exclusive economic zone. Under the OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or substantial threats of discharges, of oil from their vessels. In response to the 2010 Deepwater Horizon oil incident in the Gulf of Mexico, the U.S. House of Representatives passed and the U.S. Senate considered but did not pass a bill to strengthen certain requirements of the OPA; similar legislation may be introduced in the future.

In addition to potential liability under the federal OPA, vessel owners may in some instances incur liability on an even more stringent basis under state law in the particular state where the spillage occurred. For example, California regulations prohibit the discharge of oil, require an oil contingency plan be filed with the state, require that the ship owner contract with an oil response organization and require a valid certificate of financial responsibility, all prior to the vessel entering state waters.

In the last decade, the EU has become increasingly active in the field of regulation of maritime safety and protection of the environment. In some areas of regulation the EU has introduced new laws without attempting to procure a corresponding amendment to international law. Notably, the EU adopted in 2005 a directive, as amended in 2009, on ship-source pollution, imposing criminal sanctions for pollution not only where pollution is caused by intent or recklessness (which would be an offence under MARPOL), but also where it is caused by “serious negligence.” The concept of “serious negligence” may be interpreted in practice to be little more than ordinary negligence. The directive could therefore result in criminal liability being incurred in circumstances where it would not be incurred under international law. Criminal liability for a pollution incident could not only result in us incurring substantial penalties or fines, but may also, in some jurisdictions, facilitate civil liability claims for greater compensation than would otherwise have been payable.

We maintain insurance coverage for each owned vessel in our fleet against pollution liability risks in the amount of $1.0 billion in the aggregate for any one event. The insured risks include penalties and fines as well as civil liabilities and expenses resulting from accidental pollution. However, this insurance coverage is subject to exclusions, deductibles and other terms and conditions. If any liabilities or expenses fall within an exclusion from coverage, or if damages from a catastrophic incident exceed the aggregate liability of $1.0 billion for any one event, our cash flow, profitability and financial position would be adversely impacted.

The loss of key members of our senior management team could disrupt the management of our business.

We believe that our success depends on the continued contributions of the members of our senior management team, including Ms. Angeliki Frangou, our Chairman and Chief Executive Officer. The loss of the

 

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services of Ms. Frangou or one of our other executive officers or senior management members could impair our ability to identify and secure new charter contracts, to maintain good customer relations and to otherwise manage our business, which could have a material adverse effect on our financial performance and our ability to compete.

The Manager may on our behalf be unable to attract and retain qualified, skilled employees or crew necessary to operate our business or may have to pay substantially increased costs for its employees and crew.

Our success will depend in part on the Manager’s ability to attract, hire, train and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. Competition to attract, hire, train and retain qualified crew members is intense, and crew manning costs continue to increase. If we are not able to increase our hire rates to compensate for any crew cost increases, our business, financial condition, results of operations and ability to make cash distributions to our unitholders may be adversely affected. Any inability we experience in the future to attract, hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business.

We are subject to vessel security regulations and we incur costs to comply with adopted regulations. We may be subject to costs to comply with similar regulations that may be adopted in the future in response to terrorism.

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Security Act of 2002 (“MTSA”) came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to the International Convention for the Safety of Life at Sea (“SOLAS”) created a new chapter of the convention dealing specifically with maritime security. The new chapter went into effect in July 2004, and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the International Ship and Port Facilities Security (“ISPS”) Code. Among the various requirements are:

 

    on-board installation of automatic information systems, or AIS, to enhance vessel-to-vessel and vessel-to-shore communications;

 

    on-board installation of ship security alert systems;

 

    the development of vessel security plans; and

 

    compliance with flag state security certification requirements.

The U.S. Coast Guard regulations, intended to be aligned with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid International Ship Security Certificate (“ISSC”) that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We will implement the various security measures addressed by the MTSA, SOLAS and the ISPS Code and take measures for our vessels or vessels that we charter to attain compliance with all applicable security requirements within the prescribed time periods. Although management does not believe these additional requirements will have a material financial impact on our operations, there can be no assurance that there will not be an interruption in operations to bring vessels into compliance with the applicable requirements and any such interruption could cause a decrease in charter revenues. Furthermore, additional security measures could be required in the future that could have significant financial impact on us.

 

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The operation of ocean-going vessels entails the possibility of marine disasters including damage or destruction of a vessel due to accident, the loss of a vessel due to piracy, terrorism or political conflict, damage or destruction of cargo and similar events that are inherent operational risks of the tanker industry and may cause a loss of revenue from affected vessels and damage to our business reputation and condition, which may in turn lead to loss of business.

The operation of ocean-going vessels entails certain inherent risks that may adversely affect our business and reputation. Our vessels and their cargoes are at risk of being damaged or lost due to events such as:

 

    damage or destruction of vessel due to marine disaster such as a collision;

 

    the loss of a vessel due to piracy and terrorism;

 

    cargo and property losses or damage as a result of the foregoing or less drastic causes such as human error, mechanical failure and bad weather;

 

    environmental accidents as a result of the foregoing;

 

    business interruptions and delivery delays caused by mechanical failure, human error, acts of piracy, war, terrorism, political action in various countries, labor strikes, potential government expropriation of our vessels or adverse weather conditions; and

 

    other events and circumstances;

In addition, increased operational risks arise as a consequence of the complex nature of the crude oil, product and chemical tanker industry, the nature of services required to support the industry, including maintenance and repair services, and the mechanical complexity of the tankers themselves. Compared to other types of vessels, tankers are exposed to a higher risk of damage and loss by fire, whether ignited by a terrorist attack, collision or other cause, due to the high flammability and high volume of the oil transported in tankers. Damage and loss could also arise as a consequence of a failure in the services required to support the industry, for example, due to inadequate dredging. Inherent risks also arise due to the nature of the product transported by our vessels. Any damage to, or accident involving, our vessels while carrying crude oil could give rise to environmental damage or lead to other adverse consequences. Each of these inherent risks may also result in death or injury to persons, loss of revenues or property, higher insurance rates, damage to our customer relationships, delay or rerouting.

Any of these circumstances or events could substantially increase our costs. For example, the costs of replacing a vessel or cleaning up environmental damage could substantially lower our revenues by taking vessels out of operation permanently or for periods of time. Furthermore, the involvement of our vessels in a disaster or delays in delivery, damage or the loss of cargo may harm our reputation as a safe and reliable vessel operator and cause us to lose business. Our vessels could be arrested by maritime claimants, which could result in the interruption of business and decrease revenue and lower profitability.

Some of these inherent risks could result in significant damage, such as marine disaster or environmental incidents, and any resulting legal proceedings may be complex, lengthy, costly and, if decided against us, any of these proceedings or other proceedings involving similar claims or claims for substantial damages may harm our reputation and have a material adverse effect on our business, results of operations, cash flow and financial position. In addition, the legal systems and law enforcement mechanisms in certain countries in which we operate may expose us to risk and uncertainty. Further, we may be required to devote substantial time and cost defending these proceedings, which could divert attention from management of our business. Crew members, tort claimants, claimants for breach of certain maritime contracts, vessel mortgagees, suppliers of goods and services to a vessel, shippers of cargo and other persons may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages, and in many circumstances a maritime lien holder may enforce its lien by “arresting” a vessel through court processes. Additionally, in certain jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest not only the vessel with respect to which the claimant’s lien has arisen,

 

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but also any “associated” vessel owned or controlled by the legal or beneficial owner of that vessel. If any vessel ultimately owned and operated by us is “arrested,” this could result in a material loss of revenues, or require us to pay substantial amounts to have the “arrest” lifted.

Any of these factors may have a material adverse effect on our business, financial conditions and results of operations.

A failure to pass inspection by classification societies could result in our vessels becoming unemployable unless and until they pass inspection, resulting in a loss of revenues from such vessels for that period and a corresponding decrease in operating cash flows.

The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and with SOLAS. A vessel must undergo an annual survey, an intermediate survey and a special survey. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydocked every two to three years for inspection of the underwater parts of such vessel. If any of our vessels fail any annual survey, intermediate survey, or special survey, the vessel may be unable to trade between ports and, therefore, would be unemployable, potentially causing a negative impact on our revenues due to the loss of revenues from such vessel until it was able to trade again.

We are subject to inherent operational risks that may not be adequately covered by our insurance.

The operation of ocean-going vessels in international trade is inherently risky. Although we carry insurance for our fleet against risks commonly insured against by vessel owners and operators, including hull and machinery insurance, war risks insurance and protection and indemnity insurance (which include environmental damage and pollution insurance), all risks may not be adequately insured against, and any particular claim may not be paid. We do not currently maintain off-hire insurance, which would cover the loss of revenue during extended vessel off-hire periods, such as those that occur during an unscheduled drydocking due to damage to the vessel from accidents. Accordingly, any extended vessel off-hire, due to an accident or otherwise, could have a material adverse effect on our business and our ability to pay distributions to our unitholders. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material.

We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. A catastrophic oil spill or marine disaster could exceed our insurance coverage, which could harm our business, financial condition and operating results. Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In addition, the insurance that may be available to us may be significantly more expensive than our existing coverage.

Even if our insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a loss. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable rates for our fleet. Our insurance policies also contain deductibles, limitations and exclusions which can result in significant increased overall costs to us.

We may not have adequate insurance to compensate us for damage to or loss of our vessels, which may have a material adverse effect on our financial condition and results of operation.

We procure hull and machinery insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance coverage and war risk insurance for our fleet. We do not maintain

 

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insurance against loss of hire for our vessels, which covers business interruptions that result from the loss of use of a vessel. We may not be adequately insured against all risks. We may not be able to obtain adequate insurance coverage for our fleet in the future. The insurers may not pay particular claims. Our insurance policies may contain deductibles for which we will be responsible and limitations and exclusions that may increase our costs or lower our revenue. Moreover, insurers may default on claims they are required to pay. If our insurance is not enough to cover claims that may arise, the deficiency may have a material adverse effect on our financial condition and results of operations.

Because international tanker companies often generate most or all of their revenues in U.S. dollars, but incur a portion of their expenses in other currencies, exchange rate fluctuations could cause us to suffer exchange rate losses, thereby increasing expenses and reducing income.

We engage in worldwide commerce with a variety of entities. Although our operations may expose us to certain levels of foreign currency risk, our transactions are predominantly U.S. dollar-denominated. Transactions in currencies other than the functional currency are translated at the exchange rate in effect at the date of each transaction. Expenses incurred in foreign currencies against which the U.S. dollar falls in value can increase, decreasing our income. A greater percentage of our transactions and expenses in the future may be denominated in currencies other than U.S. dollar. As part of our overall risk management policy, we will attempt to hedge these risks in exchange rate fluctuations from time to time. We may not always be successful in such hedging activities and, as a result, our operating results could suffer as a result of un-hedged losses incurred as a result of exchange rate fluctuations. For example, as of December 31, 2013, the value of the U.S. dollar as compared to the Euro decreased by approximately 4.0% compared with the respective value as of December 31, 2012. A greater percentage of our transactions and expenses in the future may be denominated in currencies other than the U.S. dollar.

Current global economic uncertainty may negatively impact our business.

In recent years, there has been a significant adverse shift in the global economy, with operating businesses facing tightening credit, weakening demand for goods and services, deteriorating international liquidity conditions, and declining markets. Lower demand for tanker cargoes as well as diminished trade credit available for the delivery of such cargoes may create downward pressure on charter rates. If the current global economic environment persists or worsens, we may be negatively affected in the following ways:

 

    we may not be able to employ our vessels at charter rates as favorable to us as historical rates or operate such vessels profitably.

 

    the market value of our vessels could decrease significantly, which may cause us to recognize losses if any of our vessels are sold or if their values are impaired. In addition, such a decline in the market value of our vessels could prevent us from borrowing under our credit facilities or trigger a default under one of their covenants.

 

    charterers could have difficulty meeting their payment obligations to us.

If the contraction of the global credit markets and the resulting volatility in the financial markets continues or worsens that could have a material adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our common stock to decline.

Acts of piracy on ocean-going vessels have increased in frequency and magnitude, which could adversely affect our business.

The shipping industry has historically been affected by acts of piracy in regions such as the South China Sea and the Gulf of Aden. Although the frequency of sea piracy worldwide decreased during 2013 to its lowest level since its increase in 2009, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of

 

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Somalia and increasingly in the Gulf of Guinea. A significant example of the heightened level of piracy came in February 2011 when the M/V Irene SL, a crude oil tanker and the Arabian Sea which was not affiliated with us, was captured by pirates in the Arabian Sea while carrying crude oil estimated to be worth approximately $200 million. In December 2009, the Navios Apollon, a vessel owned by Navios Maritime Partners, was seized by pirates 800 miles off the coast of Somalia while transporting fertilizer from Tampa, Florida to Rozi, India and was released on February 27, 2010. In January 2014, the Nave Atropos, a vessel owned by Navios Maritime Acquisition, came under attack from a pirate action group in international waters off the coast of Yemen. The crew and the on-board security team successfully implemented the counter piracy action plan and standard operating procedures to deter the attack with no consequences to the vessel or her crew. These piracy attacks have resulted in regions (in which our vessels are deployed) being characterized by insurers as “war risk” zones or Joint War Committee (JWC) “war and strikes” listed areas. Premiums payable for insurance coverage could increase significantly and insurance coverage may be more difficult to obtain. Crew costs, including those due to employing onboard security guards, could increase in such circumstances. In addition, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition, results of operations and cash flows. Acts of piracy on ocean-going vessels could adversely affect our business and operations.

The employment of our vessels could be adversely affected by an inability to clear the oil majors’ risk assessment process, and we could be in breach of our charter agreements with respect to the VLCCs.

The shipping industry, and especially the shipment of crude oil, refined petroleum products, LPG and bulk liquid chemicals, has been, and will remain, heavily regulated. The so-called “oil majors” companies, such as Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips and Total, together with a number of commodities traders, represent a significant percentage of the production, trading and shipping logistics (terminals) of crude oil and refined products worldwide. Concerns for the environment have led the oil majors to develop and implement a strict ongoing due diligence process when selecting their commercial partners. This vetting process has evolved into a sophisticated and comprehensive risk assessment of both the vessel operator and the vessel, including physical ship inspections, completion of vessel inspection questionnaires performed by accredited inspectors and the production of comprehensive risk assessment reports. In the case of term charter relationships, additional factors are considered when awarding such contracts, including:

 

    office assessments and audits of the vessel operator;

 

    the operator’s environmental, health and safety record;

 

    compliance with the standards of the International Maritime Organization (the “IMO”), a United Nations agency that issues international trade standards for shipping;

 

    compliance with heightened industry standards that have been set by several oil companies;

 

    shipping industry relationships, reputation for customer service, technical and operating expertise;

 

    shipping experience and quality of ship operations, including cost-effectiveness;

 

    quality, experience and technical capability of crews;

 

    the ability to finance vessels at competitive rates and overall financial stability;

 

    relationships with shipyards and the ability to obtain suitable berths;

 

    construction management experience, including the ability to procure on-time delivery of new vessels according to customer specifications;

 

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    willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and

 

    competitiveness of the bid in terms of overall price.

Under the terms of our charter agreements, our charterers require that these vessels and the technical manager are vetted and approved to transport oil products by multiple oil majors. Our failure to maintain any of our vessels to the standards required by the oil majors could put us in breach of the applicable charter agreement and lead to termination of such agreement, and could give rise to impairment in the value of our vessels.

Should we not be able to successfully clear the oil majors’ risk assessment processes on an ongoing basis, the future employment of our vessels, as well as our ability to obtain charters, whether medium- or long-term, could be adversely affected. Such a situation may lead to the oil majors’ terminating existing charters and refusing to use our vessels in the future, which would adversely affect our results of operations and cash flows.

If we experienced a catastrophic loss and our insurance is not adequate to cover such loss, it could lower our profitability and be detrimental to operations.

The ownership and operation of vessels in international trade is affected by a number of inherent risks, including mechanical failure, personal injury, vessel and cargo loss or damage, business interruption due to political conditions in foreign countries, hostilities, piracy, terrorism, labor strikes and/or boycotts, adverse weather conditions and catastrophic marine disaster, including environmental accidents and collisions. All of these risks could result in liability, loss of revenues, increased costs and loss of reputation. We maintain hull and machinery insurance, protection and indemnity insurance, which include environmental damage and pollution and war risk insurance, consistent with industry standards, against these risks on our vessels and other business assets. However, we cannot assure you that we will be able to insure against all risks adequately, that any particular claim will be paid out of our insurance, or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. Our insurers also require us to pay certain deductible amounts, before they will pay claims, and insurance policies may contain limitations and exclusions, which, although we believe will be standard for the shipping industry, may nevertheless increase our costs and lower our profitability. Additionally, any increase in environmental and other regulations may also result in increased costs for, or the lack of availability of, insurance against the risks of environmental damage, pollution and other claims. Our inability to obtain insurance sufficient to cover potential claims or the failure of insurers to pay any significant claims could lower our profitability and be detrimental to our operations.

Furthermore, even if insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement ship in the event of a loss. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability. In addition, our protection and indemnity associations may not have enough resources to cover claims made against them. Our payment of these calls could result in significant expenses to us, which could reduce our cash flows and place strains on our liquidity and capital resources.

Climate change and government laws and regulations related to climate change could negatively impact our financial condition.

We are and will be, directly and indirectly, subject to the effects of climate change and may, directly or indirectly, be affected by government laws and regulations related to climate change. A number of countries have adopted or are considering the adoption of regulatory frameworks to reduce greenhouse gas emissions, such as carbon dioxide and methane. In the United States, the United States Environmental Protection Agency (“EPA”) has declared greenhouse gases to be dangerous pollutants and has issued greenhouse gas reporting requirements for emissions sources in certain industries (which do not include the shipping industry).

 

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In addition, while the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which requires adopting countries to implement national programs to reduce greenhouse gas emissions, the IMO intends to develop limits on greenhouse gases from international shipping. It has responded to the global focus on climate change and greenhouse gas emissions by developing specific technical and operational efficiency measures and a work plan for market-based mechanisms in 2011. These include the mandatory measures of the ship energy efficiency management plan (“SEEMP”), outlined above, and an energy efficiency design index (“EEDI”) for new ships. The IMO is also considering its position on market-based measures through an expert working group, which was expected to report back to its Marine Environment Protection Committee (“MEPC”) in late 2012. Among the numerous proposals being considered by the working group are the following: a port state levy based on the amount of fuel consumed by the vessel on its voyage to the port in question; a global emissions trading scheme which would allocate emissions allowances and set an emissions cap; and an international fund establishing a global reduction target for international shipping, to be set either by the UNFCCC or the IMO. At its 64th session in October 2012, the MEPC indicated that 2015 was the target year for Member States to identify market-based measures for international shipping. At its 66th session, held from March 31-April 4, 2014, the MEPC continued its work on developing technical and operational measures relating to energy-efficiency measures for ships, following the entry into force, on January 1, 2013, of the mandatory efficiency measures. It adopted the 2014 Guidelines on the Method of Calculation of the Attained EEDI, applicable to new ships. It also established a working group with an instruction to consider development of a data collection system for fuel consumption of ships. Further, it adopted amendments to MARPOL Annex VI concerning the extension of the scope of application of the EEDI to LNG carriers, ro-ro cargo ships (vehicle carriers), ro-ro cargo ships, ro-ro passenger ships and cruise passengers ships with nonconventional propulsion. Following an agreement at MEPC 65, it was confirmed that progress had been made in relation to the Update Study regarding estimated greenhouse gas emissions for international shipping, and that a report would be considered at MEPC 67 in October 2014.

In December 2011, UN climate change talks took place in Durban and concluded with an agreement referred to as the Durban Platform for Enhanced Action. The Durban Conference did not result in any proposals specifically addressing the shipping industry’s role in climate change but the progress that has been made by the IMO in this area was widely acknowledged throughout the negotiating bodies of the UNFCCC process.

The EU announced in April 2007 that it planned to expand the EU emissions trading scheme by adding vessels, and a proposal from the European Commission (“EC”) was expected if no global regime for reduction of seaborne emissions had been agreed to by the end of 2011. As of January 31, 2013 the EC had stopped short of proposing that emissions from ships be included in the EU’s emissions-trading scheme. However, on October 1, 2012 it announced that it would propose measures to monitor, verify and report on greenhouse-gas emissions from the shipping sector in early 2013. On June 28, 2013, the EC adopted a Communication setting out a strategy for progressively including greenhouse gas emissions from maritime transport in the EU’s policy for reducing its overall GHG emissions. The first step proposed by the EC is an EU Regulation that would establish an EU-wide system for the monitoring, reporting and verification of carbon dioxide emissions from large ships starting in 2018. The draft Regulation is currently working its way through the various stages of the EU legislative process (most recently the European Parliament adopted the text of the draft Regulation by way of a legislative resolution dated 16 April 2014) and will require approval from both the European Council and European Parliament before entering into force. This Regulation may be seen as indicative of an intention to maintain pressure on the international negotiating process.

We cannot predict with any degree of certainty what effect, if any, possible climate change and government laws and regulations related to climate change will have on our operations, whether directly or indirectly. However, we believe that climate change, including the possible increase in severe weather events resulting from climate change, and government laws and regulations related to climate change may affect, directly or indirectly, (i) the cost of the vessels we may acquire in the future, (ii) our ability to continue to operate as we have in the past, (iii) the cost of operating our vessels, and (iv) insurance premiums, deductibles and the availability of coverage. As a result, our financial condition could be negatively impacted by significant climate change and related governmental regulation, and that impact could be material.

 

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Our international activities increase the compliance risks associated with economic and trade sanctions imposed by the United States, the European Union and other jurisdictions.

Our international operations could expose us to risks associated with trade and economic sanctions prohibitions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the European Union and its member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may subject us to fines, penalties and other sanctions.

Iran

During the last few years, the scope of sanctions imposed against the government of Iran and persons engaging in certain activities or doing certain business with and relating to Iran has been expanded by a number of jurisdictions, including the United States, the European Union and Canada. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act (“CISADA”), which expanded the scope of the former Iran Sanctions Act. The scope U.S. sanctions against Iran were expanded subsequent to CISADA by, among other U.S. laws, the National Defense Authorization Act of 2012 (the “2012 NDAA”), the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”), Executive Order 13662, and the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”). The foregoing laws, among other things, expand the application of prohibitions to non-U.S. companies, such as our company, and introduce limits on the ability of companies and persons to do business or trade with Iran when such activities relate to specific activities such as investment in Iran, the supply or export of refined petroleum or refined petroleum products to Iran, the supply and delivery of goods to Iran which could enhance Iran’s petroleum or energy sector, and the transportation of crude oil from Iran to countries which do not enjoy Iran crude oil sanctions waivers (our tankers called in Iran but did not engage in the prohibited activities specifically identified by these sanctions). While certain of these restrictions have been suspended until November 2014 there are still limitations in place with which we need to comply. In addition to foregoing U.S. sanctions against Iran, the sanctions applicable with respect to Iran and transactions involving Iran within U.S. jurisdiction, we must comply with any applicable prohibitions of E.U. sanctions against Iran.

In 2010, the four VLCCs that comprise the initial fleet, while on charter to other parties, made calls on ports in Iran aggregating 13 days (the “2010 Port Call”). In 2011, the four VLCCs that comprise the initial fleet, while on charter to other parties, made calls on ports in Iran aggregating approximately 12 days (the “2011 Port Call”). In 2012, three of the VLCCs in the Partnership’s initial fleet while chartered to Dalian Ocean Shipping Co. (“DOSCO”) and the remaining VLCC while chartered to Formosa Petrochemical Corporation of Taiwan (“FPCT”), made port calls to Iran for a combined length of approximately 15 days for the transportation of crude oil from Iran to China and Taiwan (the “2012 Port Call”). The shipper of the cargo in all cases was National Iranian Oil Company (“NIOC”), and the recipients of the cargoes were, respectively, Unipec Asia Company Limited, HK Intertrade Company Limited and Formosa Petrochemical. NIOC is an entity identified as the Government of Iran under the Section 560.304 of title 31, Code of Federal Regulations (relating to the definition of the Government of Iran). Neither the Partnership, nor, to the knowledge of the Partnership, DOSCO and FPCT had any contact or dealings with the government of Iran or affiliates of the government of Iran in connection with these port calls, other than receiving cargo owned by NIOC.

The 2012 Port Call was limited to a routine acceptance and loading of cargo for the benefit of DOSCO and FPCT while the vessels were on charter to and under complete operational control of DOSCO and FPCT. Although NIOC was an entity whose name appeared on the U.S. Office of Foreign Assets Control’s List of Blocked Persons and Specially Designated Nationals at the time of the port calls, the purchase and lifting of crude oil shipped by that entity, did not constitute prohibited activity by the Partnership as a non-U.S. person, and as such, this did not have any legal compliance consequence for the Partnership as a non-U.S. person and to the Partnership’s transactions, which had no U.S. nexus. The acceptance and transportation of the crude oil to China also did not constitute sanctionable activity under U.S. Iran sanctions laws.

 

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With respect to the 2010 Port Call, the Partnership’s aggregate gross revenues attributable to those approximately 13 days of port calls was approximately $0.6 million. With respect to the 2011 Port Call, the Partnership’s aggregate gross revenues attributable to those approximately 12 days of port calls was approximately $0.5 million. With respect to the 2012 Port Call, the Partnership’s aggregate gross revenues those 15 days of port calls was approximately $0.7 million. Since May 2012, the vessels that will form the initial fleet of the Partnership have not performed any voyages involving calls to Iran.

Russia/Ukraine

As a result of the crisis in Ukraine and the annexation of Crimea by Russia earlier in 2014, both the US and EU have implemented sanctions against certain persons and entities. In addition, various restrictions on trade have been implemented which, amongst others, include a prohibition on the import into the EU of goods originating in Crimea or Sevastopol as well as restrictions on trade in certain dual-use and military items and restrictions in relation to various items of technology associated with the oil industry for use in deep water exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.

The U.S. has imposed sanctions against certain designated Russian entities and individuals (“U.S. Russian Sanctions Targets”). These sanctions block the property and all interests in property of the U.S. Russian Sanctions Targets. This effectively prohibits U.S. persons from engaging in any economic or commercial transactions with the U.S. Russian Sanctions Targets unless the same are authorized by the U.S. Treasury Department. While the prohibitions of these sanctions are not directly applicable to us, we have compliance measures in place to guard against transactions with U.S. Russian Sanctions Targets which may involve the United States or U.S. persons and thus implicate prohibitions.

Other U.S. Economic Sanctions Targets

In addition to Iran and certain Russian entities and individuals, as indicated above, the United States maintains economic sanctions against Syria, Sudan, Cuba, limited sanctions against North Korea, and against entities and individuals (such as entities and individuals in the foregoing targeted countries, designated terrorists, narcotics traffickers) whose names appear on the List of SDNs and Blocked Persons maintained by the U.S. Treasury Department (collectively, “Sanctions Targets”). We are subject to the prohibitions of these sanctions to the extent that any transaction or activity we engage in involves Sanctions Targets and a U.S. person or otherwise has a nexus to the United States.

Compliance

Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations, and the law may change. Moreover, despite, for example, relevant provisions in charter parties forbidding the use of our vessels in trade that would violate economic sanctions, our charterers may nevertheless violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation and be imputed to us.

We are constantly monitoring developments in the United States, the European Union and other jurisdictions that maintain economic sanctions against Iran, other countries, and other sanctions targets, including developments in implementation and enforcement of such sanctions programs. Expansion of sanctions programs, embargoes and other restrictions in the future (including additional designations of countries subject to sanctions), or modifications in how existing sanctions are interpreted or enforced, could prevent our tankers from calling in ports in sanctioned countries or could limit their cargoes. If any of the risks described above materialize, it could have a material adverse impact on our business and results of operations.

 

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To reduce the risk of violating economic sanctions, we have a policy of compliance with applicable economic sanctions laws and have implemented and continue to implement and diligently follow procedures to avoid economic sanctions violations.

We could be materially adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and anti-corruption laws in other applicable jurisdictions.

As an international shipping company, we may operate in countries known to have a reputation for corruption. The U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and other anti-corruption laws and regulations in applicable jurisdictions generally prohibit companies registered with the SEC and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Under the FCPA, U.S. companies may be held liable for some actions taken by strategic or local partners or representatives. Legislation in other countries includes the U.K. Bribery Act which is broader in scope than the FCPA because it does not contain an exception for facilitating payments. We and our customers may be subject to these and similar anti-corruption laws in other applicable jurisdictions. Failure to comply with such legal requirements could expose us to civil and/or criminal penalties, including fines, prosecution and significant reputational damage, all of which could materially and adversely affect our business and results of operations, including our relationships with our customers, and our financial results. Compliance with the FCPA, the U.K. Bribery Act and other applicable anti-corruption laws and related regulations and policies imposes potentially significant costs and operational burdens. Moreover, the compliance and monitoring mechanisms that we have in place including our Code of Ethics, which incorporates our anti-bribery and corruption policy may not adequately prevent or detect possible violations under applicable anti-bribery and anti-corruption legislation.

Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination. Inspection procedures can result in the seizure of contents of vessels, delays in the loading, offloading or delivery and the levying of customs, duties, fines and other penalties.

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our future customers and may, in certain cases, render the shipment of certain types of cargo impractical. Any such changes or developments may have a material adverse effect on our business, financial condition, and results of operations.

The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.

We expect that our vessels will call in ports in South America and other areas where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows and financial condition.

Terrorist attacks, increased hostilities or war could lead to further economic instability, increased costs and disruption of our business.

Terrorist attacks, such as the attacks in the United States on September 11, 2001 and the United States’ continuing response to these attacks, the attacks in London on July 7, 2005, as well as the threat of future terrorist attacks, continue to cause uncertainty in the world financial markets, including the energy markets. The continuing conflicts in Iraq and Afghanistan and other current and future conflicts, may adversely affect our

 

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business, operating results, financial condition, ability to raise capital and future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may contribute further to economic instability.

In addition, oil facilities, shipyards, vessels, pipelines and oil and gas fields could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil and other refined products to or from certain locations. Terrorist attacks, war or other events beyond our control that adversely affect the distribution, production or transportation of oil and other refined products to be shipped by us could entitle our customers to terminate our charter contracts, which would harm our cash flow and our business.

Terrorist attacks on vessels, such as the October 2002 attack on the M/V Limburg, a VLCC not related to us, may in the future also negatively affect our operations and financial condition and directly impact our vessels or our customers. Future terrorist attacks could result in increased volatility and turmoil in the financial markets in the United States and globally. Any of these occurrences could have a material adverse impact on our revenues and costs.

Governments could requisition vessels of a target business during a period of war or emergency, resulting in a loss of earnings.

A government could requisition a business’ vessels for title or hire. Requisition for title occurs when a government takes control of a vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although a target business would be entitled to compensation in the event of a requisition of any of its vessels, the amount and timing of payment would be uncertain.

Disruptions in world financial markets and the resulting governmental action in Europe, the United States and in other parts of the world could have a material adverse impact on our ability to obtain financing required to acquire vessels or new businesses. Furthermore, such a disruption would materially adversely affect our results of operations, financial condition and cash flows.

Global financial markets and economic conditions have been severely disrupted and volatile in recent years and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and a limited supply of credit. The renewed crisis in Argentina, civil unrest in Ukraine and other parts of the world, and continuing concerns relating to the European sovereign debt crisis have led to increased volatility in global credit and equity markets. Several European countries including Greece, Portugal and Cyprus have been affected by increasing public debt burdens and weakening economic growth prospects. In recent years, Standard and Poor’s Rating Services and Moody’s Investors Service (“Moody’s”) downgraded the long-term ratings of most European countries’ sovereign debt and initiated negative outlooks. Such downgrades could negatively affect those countries’ ability to access the public debt markets at reasonable rates or at all, materially affecting the financial conditions of banks in those countries, including those with which we maintain cash deposits and equivalents, or on which we rely on to finance our vessel and new business acquisitions. Cash deposits and cash equivalents in excess of amounts covered by government-provided insurance are exposed to loss in the event of non-performance by financial institutions. We maintain cash deposits and equivalents in excess of government-provided insurance limits at banks in Greece and other European nations, which may expose us to a loss of cash deposits or cash equivalents.

Furthermore, the United States and other parts of the world are exhibiting volatile economic trends and were recently in a recession. Despite signs of recovery, the outlook for the world economy remains uncertain. For example, the credit markets worldwide and in the U.S. have experienced significant contraction, de-leveraging and reduced liquidity, and the U.S. federal government, state governments and foreign governments have

 

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implemented and are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements. The SEC, other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws. Recently, a number of financial institutions have experienced serious financial difficulties and, in some cases, have entered bankruptcy proceedings or are in regulatory enforcement actions. These issues, along with the repricing of credit risk and the difficulties currently experienced by financial institutions have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the credit markets, many lenders have increased margins on lending rates, enacted tighter lending standards, required more restrictive terms (including higher collateral ratios for advances, shorter maturities and smaller loan amounts), or have refused to refinance existing debt at all. Additionally, certain banks that have historically been significant lenders to the shipping industry have reduced or ceased lending activities in the shipping industry. New banking regulations, including larger capital requirements and the resulting policies adopted by lenders, could reduce lending activities. We may experience difficulties obtaining financing commitments, including commitments to refinance our existing debt as payments come due under our credit facilities, in the future if lenders are unwilling to extend financing to us or unable to meet their funding obligations due to their own liquidity, capital or solvency issues. Due to the fact that we would possibly cover all or a portion of the cost of any new acquisition with debt financing, such uncertainty, combined with restrictions imposed by our current debt, could hamper our ability to finance vessels or other assets and new business acquisitions.

In addition, the economic uncertainty worldwide has made demand for shipping services volatile and has reduced charter rates, which may adversely affect our results of operations and financial condition. Currently, the economies of China, Japan, other Asian Pacific countries and India are the main driving force behind the development in seaborne transportation. Reduced demand from such economies has driven decreased rates and vessel values.

We could face risks attendant to changes in economic environments, changes in interest rates, and instability in certain securities markets, among other factors. Major market disruptions and the uncertainty in market conditions and the regulatory climate in the U.S., Europe and worldwide could adversely affect our business or impair our ability to borrow amounts under any future financial arrangements. The current market conditions may last longer than we anticipate. These recent and developing economic and governmental factors could have a material adverse effect on our results of operations, financial condition or cash flows.

Labor interruptions and problems could disrupt our business.

Certain of our vessels are manned by masters, officers and crews that are employed by third parties. If not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out normally and could have a material adverse effect on our business, results of operations, cash flow and financial condition.

In the highly competitive crude oil, refined petroleum product, LPG and chemical tanker sectors of the shipping industry, we may not be able to compete for charters with new entrants or established companies with greater resources, which may adversely affect our results of operations.

We employ our vessels in the crude oil sector and may, in the future, employ our vessels in the refined petroleum product, LPG and chemical tanker sectors, highly competitive markets that are capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than us. Competition for the transportation of refined petroleum products (clean and dirty) and bulk liquid chemicals can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and our managers to the charterers. Due in part to the highly fragmented markets, competitors with greater resources could operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets than ours.

 

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We are a holding company and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to make distributions to unitholders.

We are a holding company. Our subsidiaries will conduct all of our operations and own all of our operating assets, including our ships. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to pay our obligations and to make distributions to unitholders depends entirely on our subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim or other action by a third party, including a creditor, or by the law of its jurisdiction of incorporation which regulates the payment of distributions. If we are unable to obtain funds from our subsidiaries, our board of directors may exercise its discretion not to make distributions to unitholders.

We may be subject to litigation that could have an adverse effect on us.

We may in the future be involved from time to time in litigation matters. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, toxic tort claims, employment matters and governmental claims for taxes or duties, as well as other litigation that arises in the ordinary course of our business. We cannot predict with certainty the outcome of any claim or other litigation matter. The ultimate outcome of any litigation matter and the potential costs associated with prosecuting or defending such lawsuits, including the diversion of management’s attention to these matters, could have an adverse effect on us.

Risks Inherent in an Investment in Us

The Manager has limited experience in the crude oil, refined petroleum product and chemical tanker sectors. The Manager has no experience in the LPG sector.

The Manager, a wholly-owned subsidiary of Navios Maritime Holdings, oversees the commercial, administrative and technical management of our fleet. Navios Maritime Holdings is a vertically-integrated seaborne shipping and logistics company with 60 years of operating history in the shipping industry that held approximately 43% of Navios Maritime Acquisition’s shares of common stock as of March 14, 2014. Other than with respect to South American operations and operations through Navios Maritime Acquisition, Navios Maritime Holdings has limited experience in the crude oil, refined petroleum chemical and product tanker sectors. Such limited experience could cause Navios Maritime Holdings or the Manager to make decisions that a more experienced operator in the sector might not make. If Navios Maritime Holdings or the Manager is not able to properly assess or ascertain a particular aspect of the crude oil, refined petroleum product or chemical tanker sectors, it could have a material adverse effect on our operations. The Manager has no experience in the LPG sector.

Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners and their respective affiliates may compete with us.

Pursuant to the omnibus agreement that we, Navios Maritime Acquisition, Navios Maritime Holdings and Navios Maritime Partners will enter into in connection with the closing of this offering, Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners and their controlled affiliates (other than us, our general partner and our subsidiaries) generally will agree not to acquire or own any VLCCs, crude oil tankers, refined petroleum product tankers, LPG tankers or chemical tankers under time charters of five or more years without the consent of our general partner. The omnibus agreement, however, contains significant exceptions that will allow Navios Maritime Acquisition, Navios Maritime Holdings, Navios Maritime Partners or any of their controlled affiliates to compete with us under specified circumstances which could harm our business. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Noncompetition.”

 

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Unitholders have limited voting rights and our partnership agreement restricts the voting rights of unitholders owning more than 4.9% of our common units.

Holders of common units have only limited voting rights on matters affecting our business. We will hold a meeting of the limited partners every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. Common unitholders may only elect four of the seven members of our board of directors. The elected directors will be elected on a staggered basis and will serve for three-year terms. Our general partner in its sole discretion has the right to appoint the remaining three directors and to set the terms for which those directors will serve. The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management. Unitholders will have no right to elect our general partner and our general partner may not be removed except by a vote of the holders of at least 66 23% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class.

Our partnership agreement further restricts unitholders’ voting rights by providing that if any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders or calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other unitholders of the same class that are not subject to this voting limitation. Our general partner, its affiliates and persons who acquired units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

We have no history operating as a separate publicly traded entity and will incur increased costs as a result of being a publicly traded limited partnership.

We have no history operating as a separate publicly traded entity. As a publicly traded limited partnership, we will be required to comply with the SEC’s reporting requirements and with corporate governance and related requirements of the Sarbanes-Oxley Act, the SEC and the securities exchange on which our common units will be listed. We will incur significant legal, accounting and other expenses in complying with these and other applicable regulations. We anticipate that our general and administrative expenses as a publicly traded limited partnership taxed as a corporation for U.S. federal income tax purposes will be approximately $2.0 million annually, and will include costs associated with annual reports to unitholders, tax return, investor relations, registrar and transfer agent’s fees, director and officer liability insurance costs and director compensation.

Our general partner and its affiliates, including Navios Maritime Acquisition and Navios Maritime Holdings, own a significant interest in us and have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor their own interests to your detriment.

Following this offering, Navios Maritime Acquisition will indirectly own the 2.0% general partner interest and a     % limited partner interest in us, assuming no exercise of the underwriters’ option, and will own and control our general partner. Navios Maritime Holdings will have a ten-year option to purchase a minimum of 25% of the general partner interest held by the general partner, the incentive distribution rights held by the general partner and/or the membership interests in the general partner from Navios Maritime Acquisition, each at fair market value. Two of our executive officers also serve as executive officers of Navios Maritime Acquisition and three of our executive officers and one of our directors also serve as executive officers and/or directors of Navios Maritime Holdings and as such they have fiduciary duties to Navios Maritime Acquisition and Navios Maritime Holdings that may cause them to pursue business strategies that disproportionately benefit Navios Maritime Acquisition or Navios Maritime Holdings or which otherwise are not in the best interests of us or our unitholders. Conflicts of interest may

 

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arise between Navios Maritime Acquisition and Navios Maritime Holdings and their affiliates, including our general partner on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner and its affiliates may favor their own interests over the interests of our unitholders. Please read “—Our partnership agreement limits our general partner’s and our directors’ fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner or our directors.” These conflicts include, among others, the following situations:

 

    neither our partnership agreement nor any other agreement requires our general partner or Navios Maritime Acquisition or Navios Maritime Holdings or their affiliates to pursue a business strategy that favors us or utilizes our assets, and Navios Maritime Acquisition’s and Navios Maritime Holdings’ officers and directors have a fiduciary duty to make decisions in the best interests of the stockholders of Navios Maritime Acquisition and Navios Maritime Holdings, which may be contrary to our interests;

 

    our general partner and our board of directors are allowed to take into account the interests of parties other than us, such as Navios Maritime Acquisition and Navios Maritime Holdings, in resolving conflicts of interest, which has the effect of limiting their fiduciary duties to our unitholders;

 

    our general partner and our directors have limited liabilities and reduced their fiduciary duties under the laws of the Marshall Islands, while the remedies available to our unitholders are also restricted, and, as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner and our directors, all as set forth in the partnership agreement;

 

    our general partner and our board of directors will be involved in determining the amount and timing of our asset purchases and sales, capital expenditures, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders;

 

    our general partner may have substantial influence over our board of directors’ decision to cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units or to make incentive distributions or to accelerate the expiration of the subordination period;

 

    our general partner is entitled to reimbursement of all reasonable costs incurred by it and its affiliates for our benefit;

 

    our partnership agreement does not restrict us from paying our general partner or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf; and

 

    our general partner may exercise its right to call and purchase our common units if it and its affiliates own more than 80% of our common units.

Although a majority of our directors will over time be elected by common unitholders, our general partner will likely have substantial influence on decisions made by our board of directors. Please read “Certain Relationships and Related Party Transactions,” “Conflicts of Interest and Fiduciary Duties” and “The Partnership Agreement.”

Our officers face conflicts in the allocation of their time to our business.

Two of our executive officers, excluding our Chief Financial Officer, are also executive officers of Navios Maritime Acquisition and three of our executive officers and one of our directors also serve as executive officers and/or directors of Navios Maritime Holdings. Navios Maritime Acquisition and Navios Maritime Holdings conduct substantial businesses and activities of their own in which we have no economic interest. If these separate activities are significantly greater than our activities, there will be material competition for the time and

 

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effort of our officers, who also provide services to affiliates of Navios Maritime Acquisition and Navios Maritime Holdings. Our officers are not required to work full-time on our affairs and, in the future, we may have additional officers that also provide services to Navios Maritime Acquisition and Navios Maritime Holdings and their affiliates. Based solely on the anticipated relative sizes of our initial fleet and the fleet owned by Navios Maritime Acquisition and Navios Maritime Holdings and their affiliates over the next twelve months, we estimate that our officers, excluding our Chief Financial Officer, may spend a substantial portion of their monthly business time dedicated to the business activities of Navios Maritime Acquisition and Navios Maritime Holdings and their affiliates. However, the actual allocation of time could vary significantly from time to time depending on various circumstances and needs of the businesses, such as the relative levels of strategic activities of the businesses. Our Chief Financial Officer, Erifili Tsironi, is not an officer of Navios Maritime Acquisition or Navios Maritime Holdings and will dedicate her time primarily to our business.

Our partnership agreement limits our general partner’s and our directors’ fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner or our directors.

Our partnership agreement contains provisions that reduce the standards to which our general partner and directors would otherwise be held by Marshall Islands law. For example, our partnership agreement:

 

    permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. Where our partnership agreement permits, our general partner may consider only the interests and factors that it desires, and in such cases it has no fiduciary duty or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unitholders. Decisions made by our general partner in its individual capacity will be made by its sole owner, Navios Maritime Acquisition. Specifically, pursuant to our partnership agreement, our general partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights or registration rights, consents or withholds consent to any merger or consolidation of the partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraws from the partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units, general partner interest or incentive distribution rights or votes upon the dissolution of the partnership;

 

    provides that our general partner and our directors are entitled to make other decisions in “good faith” if they reasonably believe that the decision is in our best interests;

 

    generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of our board of directors and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our board of directors may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and

 

    provides that neither our general partner nor our officers or our directors will be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or directors or our officers or directors or those other persons engaged in actual fraud or willful misconduct.

In order to become a limited partner of our partnership, a common unitholder is required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

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Fees and cost reimbursements, which the Manager will determine for services provided to us, will be significant, may be higher in the third through fifth year periods than the fixed fees incurred in the first and second year periods after the closing of the offering, will be payable regardless of profitability and will reduce our cash available for distribution.

Under the terms of our management agreement with the Manager, we will pay a daily fee of $9,500 per VLCC for technical and commercial management services provided to us by the Manager. The initial term of the management agreement will be five years from the closing of this offering and this fee will be fixed for the first two years of that agreement. The daily fee to be paid to the Manager includes all costs incurred in providing certain commercial and technical management services to us as described under “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Management Agreement.” While this fee is fixed for an initial term of two years, for the remaining three years of the term of the management agreement, we expect that we will reimburse the Manager for all of the actual operating costs and expenses it incurs in connection with the management of our fleet, which may result in significantly higher fees for the remaining three years of the term. All of the fees we are required to pay to the Manager under the management agreement will be payable to our manager without regard to our financial condition or results of operations. In addition, the Manager will provide us with administrative services, including the services of our officers and directors, pursuant to an administrative services agreement which has an initial term of five years, and we will reimburse the Manager for all costs and expenses reasonably incurred by it in connection with the provision of those services. The exact amount of these future costs and expenses are unquantifiable at this time. The fees and reimbursement of expenses to the Manager are payable regardless of our profitability and could materially adversely affect our ability to pay cash distributions.

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner, and even if public unitholders are dissatisfied, they will be unable to remove our general partner without Navios Maritime Acquisition’s consent, unless Navios Maritime Acquisition’s ownership share in us is decreased; all of which could diminish the trading price of our common units.

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner.

 

    The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 23% of all outstanding common and subordinated units voting together as a single class is required to remove the general partner. Following the closing of this offering, Navios Maritime Acquisition will own 56.7% of the total number of common and subordinated units, assuming no exercise of the underwriters’ option.

 

   

If our general partner is removed without “cause” during the subordination period and units held by our general partner and Navios Maritime Acquisition are not voted in favor of that removal, (i) all remaining subordinated units will automatically convert into common units, (ii) any existing arrearages on the common units will be extinguished and (iii) our general partner will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash in exchange for those interests based on the fair market value of the interests at the time. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Any conversion of the general partner interest and incentive distribution rights would be dilutive to existing unitholders. Furthermore, any cash payment in lieu of such conversion could be prohibitively large. “Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor business decisions such as charges of poor management of our business by the directors

 

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appointed by our general partner, so the removal of our general partner because of the unitholders’ dissatisfaction with the general partner’s decisions in this regard would most likely result in the termination of the subordination period.

 

    Common unitholders elect only four of the seven members of our board of directors. Our general partner in its sole discretion has the right to appoint the remaining three directors.

 

    Election of the four directors elected by unitholders is staggered, meaning that the members of only one of three classes of our elected directors are selected each year. In addition, the directors appointed by our general partner will serve for terms determined by our general partner.

 

    Our partnership agreement contains provisions limiting the ability of unitholders to call meetings of unitholders, to nominate directors and to acquire information about our operations as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

    Unitholders’ voting rights are further restricted by the partnership agreement provision providing that if any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders or calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 4.9% will be effectively redistributed pro rata among the other unitholders of the same class that are not subject to this voting limitation. Our general partner, its affiliates and persons who acquired units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

 

    We have substantial latitude in issuing equity securities without unitholder approval.

The effect of these provisions may be to diminish the price at which the common units will trade.

The control of our general partner may be transferred to Navios Maritime Holdings or a third party without unitholder consent.

Navios Maritime Holdings will have a ten-year option to purchase a minimum of 25% of the general partner interest held by the general partner, the incentive distribution rights held by the general partner and/or the membership interests in the general partner from Navios Maritime Acquisition, each at fair market value, without the consent of unitholders. Our general partner may also transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. In addition, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective membership interests in our general partner to a third party.

Substantial future sales of our common units in the public market could cause the price of our common units to fall.

We have granted registration rights to Navios Maritime Acquisition and certain affiliates of Navios Maritime Acquisition. These unitholders have the right subject to some conditions to require us to file registration statements covering any of our common, subordinated or other equity securities owned by them or to include those securities in registration statements that we may file for ourselves or other unitholders. Upon the closing of this offering, Navios Maritime Acquisition will directly own 1,242,692 common units and 9,342,692 subordinated units and will indirectly own 381,334 general partner units and all of the incentive distribution rights. Following their registration and sale under an applicable registration statement, those securities will become freely tradable. By exercising their registration rights and selling a large number of common units or other securities, these unitholders could cause the price of our common units to decline.

 

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You will experience immediate and substantial dilution of $8.62 per common unit.

The assumed initial public offering price of $20.00 per common unit exceeds pro forma net tangible book value of $11.38 per common unit. Based on the assumed initial public offering price, you will incur immediate and substantial dilution of $8.62 per common unit. This dilution results primarily because the assets contributed by our general partner and its affiliates are recorded at their historical cost, and not their fair value, in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Please read “Dilution.”

We may issue additional equity securities in connection with acquisitions and may do so without your approval, which would dilute your ownership interests.

We may, without the approval of our unitholders, issue an unlimited number of additional units or other equity securities. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

    our unitholders’ proportionate ownership interest in us will decrease;

 

    the amount of cash available for distribution on each unit may decrease;

 

    because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

    the relative voting strength of each previously outstanding unit may be diminished; and

 

    the market price of the common units may decline.

If we exercise our option to purchase the seven additional VLCCs from Navios Maritime Acquisition, we may finance such acquisition, in whole or in part, by issuing additional equity securities. If we expand the size of our fleet in the future, we generally will be required to make significant installment payments for acquisitions of vessels prior to their delivery and generation of revenue. Depending on whether we finance our expenditures through cash from operations or by issuing debt or equity securities, our ability to make cash distributions may be diminished or our financial leverage could increase or our unitholders could be diluted.

Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash.

During the subordination period, which we define elsewhere in this prospectus, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.4125 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units. Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash. See “How We Make Cash Distributions—Subordination Period”, “—Distributions of Available Cash From Operating Surplus During the Subordination Period” and “—Distributions of Available Cash From Operating Surplus After the Subordination Period”.

In establishing cash reserves, our board of directors may reduce the amount of cash available for distribution to you.

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. These reserves also will affect the amount of cash available for distribution to our unitholders. Our board of directors may establish reserves for distributions

 

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on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters. As described above in “—Risks Inherent in Our Business—We must make substantial capital expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution. In addition, each quarter our board of directors is required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted,” our partnership agreement requires our board of directors each quarter to deduct from operating surplus estimated maintenance and replacement capital expenditures, as opposed to actual expenditures, which could reduce the amount of available cash for distribution. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our board of directors at least once a year, provided that any change must be approved by the conflicts committee of our board of directors.

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

If at any time our general partner and its affiliates, including Navios Maritime Acquisition, own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

At the completion of this offering, Navios Maritime Acquisition, an affiliate of our general partner, will own 1,242,692 of our common units. At the end of the subordination period, assuming no additional issuances of common units, no exercise of the underwriters’ option and conversion of our subordinated units into common units, Navios Maritime Acquisition will own 10,585,384 common units, representing a 55.5% limited partner interest in us.

You may not have limited liability if a court finds that unitholder action constitutes control of our business.

As a limited partner in a partnership organized under the laws of the Marshall Islands, you could be held liable for our obligations to the same extent as a general partner if you participate in the “control” of our business. Our general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. Please read “The Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations on liability of a unitholder.

We can borrow money to pay distributions, which would reduce the amount of credit available to operate our business.

Our partnership agreement will allow us to make working capital borrowings to pay distributions. Accordingly, we can make distributions on all our units even though cash generated by our operations may not be sufficient to pay such distributions. Any working capital borrowings by us to make distributions will reduce the amount of working capital borrowings we can make for operating our business. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Increases in interest rates may cause the market price of our common units to decline.

An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular for yield-based equity investments such as our common units. Any such increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment

 

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opportunities may cause the trading price of our common units to decline. In addition, our interest expense will increase, since initially our debt will bear interest at a floating rate, subject to any interest rate swaps we may enter into the future.

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for the common units. Immediately upon completion of this offering, there will be only 9,342,692 common units outstanding. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

Unitholders may have liability to repay distributions.

Under some circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Marshall Islands law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Marshall Islands law will be liable to the limited partnership for the distribution amount. Assignees who become substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the assignee at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

We have been organized as a limited partnership under the laws of the Republic of the Marshall Islands, which does not have a well developed body of partnership law; as a result, unitholders may have more difficulty in protecting their interests than would unitholders of a similarly organized limited partnership in the United States.

Our partnership affairs are governed by our partnership agreement and by the Marshall Islands Act. The provisions of the Marshall Islands Act resemble provisions of the limited partnership laws of a number of states in the United States, most notably Delaware. The Marshall Islands Act also provides that it is to be applied and construed to make it uniform with the Delaware Revised Uniform Partnership Act and, so long as it does not conflict with the Marshall Islands Act or decisions of the Marshall Islands courts, interpreted according to the non-statutory law (or case law) of the State of Delaware. There have been, however, few, if any, court cases in the Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute. Accordingly, we cannot predict whether Marshall Islands courts would reach the same conclusions as the courts in Delaware. For example, the rights of our unitholders and the fiduciary responsibilities of our general partner under Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions by our officers or directors than would unitholders of a similarly organized limited partnership in the United States.

Because we are organized under the laws of the Marshall Islands and our business is operated primarily from our office in Monaco, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.

We are organized under the laws of the Marshall Islands, and all of our assets are located outside of the United States. Our business is operated primarily from our office in Monaco. In addition, our general partner is a

 

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Marshall Islands limited liability company, and our directors and officers generally are or will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Marshall Islands, Monaco and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of our general partner or our directors or officers. For more information regarding the relevant laws of the Marshall Islands, please read “Service of Process and Enforcement of Civil Liabilities.”

Because the Public Company Accounting Oversight Board is not currently permitted to inspect registered public accounting firms in Greece, including our independent registered public accounting firm, you may not benefit from such inspections.

Auditors of U.S. public companies, including our independent registered public accounting firm, are required by the laws of the United States to undergo periodic Public Company Accounting Oversight Board (“PCAOB”) inspections to assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. The laws of certain European Union countries, including Greece, do not currently permit the PCAOB to conduct inspections of accounting firms established and operating in such European Union countries. Accordingly, the PCAOB is currently prevented from fully evaluating the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures. Unlike shareholders or potential shareholders of most U.S. public companies, our shareholders would be deprived of the possible benefits of such PCAOB inspections.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common units less attractive to investors.

We are an “emerging growth company”, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” as described under “Summary—Implications of Being an Emerging Growth Company”. We have elected to opt out of the extended transition period for complying with new or revised accounting standards under Section 107(b) of the JOBS Act, which election is irrevocable. We cannot predict if investors will find our common units less attractive because we may rely on these exemptions. If some investors find our common units less attractive as a result, there may be a less active trading market for our common units and our unit price may be more volatile.

In addition, under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies.

Tax Risks

In addition to the following risk factors, you should read “Business—Taxation of the Partnership,” “Material U.S. Federal Income Tax Considerations” and “Non-United States Tax Consideration—Marshall Islands Tax Consequences” for a more complete discussion of the expected material U.S. federal income and Marshall Islands tax considerations relating to us and the ownership and disposition of our common units.

We may be subject to taxes, which may reduce our cash available for distribution to our unitholders.

We and our subsidiaries may be subject to tax in the jurisdictions in which we are organized or operate, reducing the amount of cash available for distribution. In computing our tax obligation in these jurisdictions, we

 

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are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on us or our subsidiaries, further reducing the cash available for distribution. In addition, changes in our operations or ownership could result in additional tax being imposed on us or our subsidiaries in jurisdictions in which operations are conducted.

U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. unitholders.

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes if at least 75.0% of its gross income for any taxable year consists of certain types of “passive income,” or at least 50.0% of the average value of the entity’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” generally includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. unitholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their units in the PFIC, as well as additional U.S. federal income tax filing obligations.

Based on our current and projected method of operation, we believe that we will not be a PFIC for our taxable year, and we expect that we will not become a PFIC with respect to any other taxable year. In this regard, we expect that all of the vessels in our fleet will be engaged in time chartering activities and intend to treat our income from those activities as non-passive income, and the vessels engaged in those activities as non-passive assets, for PFIC purposes. However, we cannot assure you that the method of our operations, or the nature or composition of our income or assets, will not change in the future and that we will not become a PFIC. Moreover, although there is legal authority for our position, there is also contrary authority and no assurance can be given that the Internal Revenue Service, or the IRS, will accept our position. Please read “Material U.S. Federal Income Tax Considerations—Taxation of U.S. Holders—PFIC Status and Significant Tax Consequences.”

We may have to pay tax on U.S. source income, which would reduce our earnings.

Under the Code, 50.0% of the gross transportation income of a vessel-owning or chartering corporation that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States is characterized as U.S. source international transportation income. U.S. source international transportation income generally is subject to a 4.0% U.S. federal income tax without allowance for deduction or, if such U.S. source international transportation income is effectively connected with the conduct of a trade or business in the United States, U.S. federal corporate income tax (presently imposed at up to a 35.0% rate) as well as a branch profits tax (presently imposed at a 30.0% rate on effectively connected earnings), unless the non-U.S. corporation qualifies for exemption from tax under Section 883 of the Code.

We believe that we will qualify for the statutory tax exemption under Section 883 of the Code, and we intend to take this position for U.S. federal income tax return reporting purposes. Please read “Business—Taxation of the Partnership.” However, our position is based on certain assumptions regarding us, our units and the holders thereof, and there are factual circumstances, including some that may be beyond our control, that could cause us to fail to qualify for the benefit of this tax exemption. Furthermore, our board of directors could determine that it is in our best interests to take an action or actions that would result in this tax exemption not applying to us. In addition, our position that we qualify for this exemption is based upon legal authorities that do not expressly contemplate an organizational structure such as ours; specifically, although we have elected to be treated as a corporation for U.S. federal income tax purposes, we are organized as a limited partnership under

 

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Marshall Islands law. Therefore, we cannot give any assurance that the IRS will not take a different position regarding our qualification for this tax exemption.

If we were not entitled to the Section 883 exemption for any taxable year, we generally would be subject to a 4.0% U.S. federal gross income tax with respect to our U.S. source international transportation income or, if such U.S. source international transportation income were effectively connected with the conduct of a trade or business in the United States, U.S. federal corporate income tax as well as a branch profits tax for any such taxable year or years. Our failure to qualify for the Section 883 exemption could have a negative effect on our business and would result in decreased earnings available for distribution to our unitholders.

You may be subject to income tax in one or more non-U.S. countries, including Greece, as a result of owning our common units if, under the laws of any such country, we are considered to be carrying on business there. Such laws may require you to file a tax return with and pay taxes to those countries.

We intend that our affairs and the business of each of our subsidiaries will be conducted and operated in a manner that minimizes income taxes imposed upon us and our subsidiaries or which may be imposed upon you as a result of owning our common units. However, because we are organized as a partnership, there is a risk in some jurisdictions that our activities and the activities of our subsidiaries may be attributed to our unitholders for tax purposes and, thus, that you will be subject to tax in one or more non-U.S. countries, including Greece, as a result of owning our common units if, under the laws of any such country, we are considered to be carrying on business there. If you are subject to tax in any such country, you may be required to file a tax return with and to pay tax in that country based on your allocable share of our income. We may be required to reduce distributions to you on account of any withholding obligations imposed upon us by that country in respect of such allocation to you. The United States may not allow a tax credit for any foreign income taxes that you directly or indirectly incur.

We believe we can conduct our activities in such a manner that our unitholders should not be considered to be carrying on business in Greece solely as a consequence of the acquisition, holding, disposition or redemption of our common units. However, the question of whether either we or any of our subsidiaries will be treated as carrying on business in any particular country, including Greece, will be largely a question of fact to be determined based upon an analysis of contractual arrangements, including the management agreement and the administrative services agreement we will enter into with the Manager, and the way we conduct business or operations, all of which may change over time. Furthermore, the laws of Greece or any other country may change in a manner that causes that country’s taxing authorities to determine that we are carrying on business in such country and are subject to its taxation laws. Any foreign taxes imposed on us or any subsidiaries will reduce our cash available for distribution.

The portion of our distributions that will be taxed as dividend income is subject to business, economic and other uncertainties as well as tax reporting positions with which the IRS may disagree, any of which could be resolved against us, result in a higher ratio of dividend income to distributions and adversely affect the value of the common units.

We estimate that if you hold the common units that you purchase in this offering through the period ending December 31, 2018, the distributions you receive that will constitute dividends for U.S. federal income tax purposes will be approximately 22% of the total cash distributions received during that period. The remaining portion of the distributions will be treated first as a nontaxable return of capital to the extent of your tax basis in the common units and thereafter as capital gain. These estimates are based on certain assumptions which are subject to business, economic, regulatory, competitive and political uncertainties beyond our control. In addition, these estimates are based on current U.S. federal income tax law and tax reporting positions that we will adopt and with which the IRS could disagree. As a result of these uncertainties, these estimates may be incorrect and the actual percentage of total cash distributions that will constitute dividend income could be higher, and any difference could adversely affect the value of the common units. Please read “Material U.S. Federal Income Tax Considerations—Taxation of U.S. Holders—Ratio of Dividend Income to Distributions.”

 

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FORWARD-LOOKING STATEMENTS

Statements included in this prospectus which are not historical facts (including our statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements which are also forward-looking statements. Such statements include, in particular, statements about our plans, strategies, business prospects, changes and trends in our business, the markets in which we operate, and our ability to make cash distributions in the future as described in this prospectus. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology.

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

    any forecasts or predictions regarding the amount of and our ability to make any cash distributions to our unitholders in the future;

 

    our ability to maintain or develop new and existing customer relationships, including our ability to enter into charters for our vessels;

 

    our ability to successfully grow our business and our capacity to manage our expanding business;

 

    our future operating and financial results, including the amount of fixed hire and profit share that we may receive;

 

    our ability to identify and consummate desirable acquisitions, joint ventures or strategic alliances, business strategy, areas of possible expansion, and expected capital expenditure or operating expenses;

 

    tanker industry trends, including charter rates and vessel values and factors affecting vessel supply and demand;

 

    our ability to take delivery of, integrate into our fleet, and employ the newbuildings we have on firm order or any newbuildings we may order in the future and the ability of shipyards to deliver vessels on a timely basis;

 

    the aging of our vessels and resultant increases in operation and drydocking costs;

 

    the ability of our vessels to pass classification inspection and vetting inspections by oil majors;

 

    significant changes in vessel performance, including increased vessel breakdowns;

 

    the creditworthiness of our charterers and the ability of our contract counterparties to fulfill their obligations to us;

 

    our ability to repay outstanding indebtedness, to obtain additional financing and to obtain replacement charters for our vessels, in each case, at commercially acceptable rates or at all;

 

    changes to governmental rules and regulations or action taken by regulatory authorities and the expected costs thereof;

 

    potential liability from litigation and our vessel operations, including discharge of pollutants;

 

    changes in general economic and business conditions;

 

    general domestic and international political conditions, including wars, acts of piracy and terrorism;

 

    changes in production of or demand for oil and petroleum products, either globally or in particular regions; and

 

    changes in the standard of service or the ability of our technical manager to be approved as required.

 

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These and other forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties, including those set forth below, as well as those risks discussed in “Risk Factors”.

The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, the Company’s management. Our independent auditors have neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, our independent auditors do not express an opinion or any other form of assurance with respect thereto. Our independent auditors’ report included in this prospectus relates to the Company’s historical financial information. It does not extend to the prospective financial information and should not be read to do so.

The forward-looking statements, contained in this prospectus, are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated.

The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

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USE OF PROCEEDS

The proceeds from this offering will be used primarily to fund a portion of the purchase price of the capital stock in the subsidiaries of Navios Maritime Acquisition that own the four vessels in our initial fleet.

The purchase price of the capital stock of the subsidiaries that own the four vessels in our initial fleet will be equal to:

 

    all of the net proceeds from our sale of an aggregate of 8,100,000 common units in this offering (estimated at $148.3 million, based on (i) the assumed initial public offering price of $20.00 per common unit and (ii) underwriting discount and other offering expenses of $13.7 million), plus

 

    $110.6 million of the $126.0 million of borrowings under our new credit facility, plus

 

    9,342,692 subordinated units and 1,242,692 common units to be issued to Navios Maritime Acquisition, plus

 

    the 2.0% general partner interest and all of our incentive distribution rights to be issued to our general partner.

Based on the assumed initial public offering price of $20.00 per common unit and assuming that the fair market value of each subordinated unit and general partner unit is $20.00, the total dollar value of the consideration to be paid to Navios Maritime Acquisition for the capital stock of the subsidiaries that own or have rights to the vessels in our initial fleet is approximately $478.2 million. Please see “Note 4: Vessels, net of the unaudited condensed notes to the condensed combined financial statements of the Partnership.

The initial public offering price of our common units, as well as the total consideration to be paid to Navios Maritime Acquisition for the capital stock of the subsidiaries that own the four vessels in our initial fleet was determined through negotiations among us and the representatives of the underwriters. In addition to prevailing market conditions, the factors considered in determining the initial public offering price as well as the total consideration for the capital stock of the subsidiaries that own the vessels in our initial fleet were:

 

    the valuation multiples of publicly traded companies that the representatives believe to be comparable to us,

 

    our financial information,

 

    the history of, and the prospects for, our partnership and the industry in which we compete,

 

    an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, and

 

    the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

Please read “Underwriting.”

We will use the net proceeds of any exercise of the underwriters’ option to redeem for cash a number of common units from Navios Maritime Acquisition equal to the number of units for which the underwriters exercise their option.

Navios Maritime Acquisition will use the proceeds it receives from us for general corporate purposes. These general corporate purposes may include the acquisition of additional vessels, capital expenditures or the repayment of debt.

 

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CAPITALIZATION

The following table shows:

 

    our historical cash and cash equivalents and capitalization as of September 30, 2014; and

 

    our cash and cash equivalents and capitalization as of September 30, 2014, on a pro forma as adjusted basis to reflect the transactions described below assuming no exercise of the underwriters’ option and the sale of common units at an assumed initial public offering price of $20.00 per common unit:

 

    We will sell 8,100,000 common units to the public in this offering, representing a 42.5% limited partner interest in us for net proceeds of $148.3 million;

 

    We will enter into a new credit facility that will provide us with financing availability of up to $126.0 million, and we will borrow $126.0 million thereunder upon the closing of the offering; and

 

    At or immediately after the closing of this offering, Navios Maritime Acquisition will contribute to us all of the outstanding shares of capital stock of two of Navios Maritime Acquisition’s vessel-owning subsidiaries (Shinyo Ocean Limited and Shinyo Kannika Limited), and Navios Maritime Acquisition will sell to us all of the outstanding shares of capital stock of two of Navios Maritime Acquisition’s vessel-owning subsidiaries (Shinyo Kieran Limited and Shinyo Saowalak Limited) in exchange for (i) all of the net proceeds from this offering ($148.3 million based on the initial public offering price of $20.00 per common unit), (ii) $110.6 million of the $126.0 million that we will borrow under the new credit facility that we will enter into at the closing of this offering, (iii) the issuance of 9,342,692 subordinated units and 1,242,692 common units to Navios Maritime Acquisition and (iv) the issuance of 381,334 general partner units, representing a 2.0% general partner interest in us, and of all of our incentive distribution rights, which will entitle the holder to increasing percentages of the cash we distribute in excess of $0.4774 per unit per quarter to our general partner. See “Use of Proceeds.”

 

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This table is derived from and should be read together with the audited and unaudited pro forma combined financial statements and the accompanying notes contained elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds.”

 

     As of September 30, 2014  
     Actual      Pro Forma—As
Adjusted
 
     (In thousands of U.S. Dollars)  

Cash and cash equivalents

   $ 6,057       $ 20,000   
  

 

 

    

 

 

 

Debt

     

Ship Mortgage Notes(2)

   $ 341,034       $ —     

New Credit Facility(1)(2)

     —           126,000   
  

 

 

    

 

 

 

Total Debt

     341,034         126,000   
  

 

 

    

 

 

 

Partners’ capital:

     

Held by public

     

Common units (8,100,000 on an as adjusted basis)

   $ —         $ 148,270   

Held by general partner and its affiliates

     

Common units (1,242,692 units on an as adjusted basis)

     —           11,884   

General partner interest (381,334 units on an as adjusted basis)

     —           3,647   

Subordinated units (9,342,692 units on an as adjusted basis)

     —           89,350   
  

 

 

    

 

 

 

Total partners’ capital

     —           253,151   
  

 

 

    

 

 

 

Owner’s net investment

     104,051         —     
  

 

 

    

 

 

 

Total capitalization

   $ 445,085       $ 379,151   
  

 

 

    

 

 

 

 

(1) All debt is guaranteed by our subsidiaries and secured by mortgages covering our vessels.
(2) The Ship Mortgage Notes will not be transferred to us upon completion of this offering and our vessel-owning subsidiaries will be released from their full and unconditional guarantees of the Ship Mortgage Notes. Our new credit facility is expected to provide us with financing availability of up to $126.0 million. $110.6 million of this amount will be used to pay a portion of the cash purchase price for the capital stock of the subsidiaries to be acquired by us from Navios Maritime Acquisition. $1.4 million of this amount will be used to pay estimated financing fees and $13.9 million of this amount will be retained by us for working capital. If the initial public offering price is below $20.00 per common unit, we will fund any additional amounts needed to purchase the vessels with additional borrowings.

 

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DILUTION

Dilution is the amount by which the offering price will exceed the net tangible book value per common unit after this offering. Based on the assumed initial public offering price of $20.00 per common unit, on a pro forma basis as of September 30, 2014, after giving effect to this offering of common units, the application of the net proceeds in the manner described under “Use of Proceeds” and the formation transactions related to this offering, our net tangible book value would have been $216.9 million, or $11.38 per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

      $ 20.00   

Pro forma net tangible book value per common unit before this offering(1)

   5.63   

Increase in net tangible book value per common unit attributable to new investors in this offering

  

5.75

  
  

 

  

Less: Pro forma net tangible book value per common unit after this offering(2)

        11.38   
     

 

 

 

Immediate dilution in net tangible book value per common unit to new investors in this offering

      $ 8.62   
     

 

 

 

 

(1) Determined by dividing the total number of units (9,342,692 subordinated units, 1,242,692 common units and the 2.0% general partner interest represented by 381,334 general partner units) to be issued to our general partner and its affiliates for their sale and contribution of assets and liabilities to us into the net tangible book value of the contributed assets and liabilities.
(2) Determined by dividing the total number of units (9,342,692 common units, 9,342,692 subordinated units and the 2.0% general partner interest represented by 381,334 general partner units) to be outstanding after this offering into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired     Total Consideration  
     Number      Percent     Amount      Percent  

General partner and its affiliates(1)(2)

     10,966,718         57.5     104,881,0000         39.3

New investors

     8,100,000         42.5     162,000,000         60.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     19,066,718         100.0     266,881,000         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates, including Navios Maritime Acquisition, will own an aggregate of 9,342,692 subordinated units, 1,242,692 common units and the 2.0% general partner interest represented by 381,334 general partner units. We will use the net proceeds of any exercise of the underwriters’ option to redeem for cash a number of common units from Navios Maritime Acquisition equal to the number of units for which the underwriters exercise their option. If the underwriters exercise their overallotment option in full, our general partner and its affiliates, including Navios Maritime Acquisition, will own an aggregate of 9,342,692 subordinated units, 27,692 common units and the 2.0% general partner interest represented by general partner units, and new investors will own 9,315,000 common units.

 

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(2) The assets contributed by our general partner and its affiliates were recorded at historical book value, rather than fair value, in accordance with U.S. GAAP. Book value of the consideration provided by our general partner and its affiliates, as of September 30, 2014, after giving effect to the application of the net proceeds of the offering, the concurrent offering and the related transactions, is as follows:

 

     (In thousands)  

Book value of net assets contributed

   $ 363,759   

Less:

  

Distribution to Navios Maritime Acquisition from the net proceeds of the offering

     (148,270

Distribution to Navios Maritime Acquisition from borrowings under the credit facility

     (110,608
  

 

 

 

Total consideration

   $ 104,881   
  

 

 

 

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

General

Rationale for Our Cash Distribution Policy

Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing our cash available (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributing all of our available cash. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves).

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time, including:

 

    Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our partnership agreement to distribute available cash on a quarterly basis, which is subject to the broad discretion of our board of directors to establish reserves and other limitations.

 

    While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Although during the subordination period, with certain exceptions, our partnership agreement may not be amended without the approval of non-affiliated common unitholders, our partnership agreement can be amended with the approval of a majority of the outstanding common units after the subordination period has ended. Upon the closing of this offering, Navios Maritime Acquisition will own 13.3% of our outstanding common units and will own 100.0% of our outstanding subordinated units.

 

    Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement.

 

    Under Section 51 of the Marshall Islands Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

 

    We may lack sufficient cash to pay distributions to our unitholders due to decreases in net revenues or increases in operating expenses, principal and interest payments on outstanding debt, tax expenses, working capital requirements, maintenance and replacement capital expenditures or anticipated cash needs.

 

    Our distribution policy will be affected by restrictions on distributions under our new credit facility that we will enter into in connection with the closing of this offering. Specifically, our new credit facility contains material financial tests that must be satisfied and we will not pay any distributions that will cause us to violate our credit facility or other debt instruments. Should we be unable to satisfy these restrictions included in the proposed new credit facility or if we are otherwise in default under our new credit facility, our ability to make cash distributions to you, notwithstanding our cash distribution policy, would be materially adversely affected.

 

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    If we make distributions out of capital surplus, as opposed to operating surplus, such distributions will constitute a return of capital and will result in a reduction in the minimum quarterly distribution and the target distribution levels. We do not anticipate that we will make any distributions from capital surplus.

Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of existing and future indebtedness, applicable partnership and limited liability company laws and other laws and regulations.

We have a limited operating history upon which to rely with respect to whether we will have sufficient cash available for distributions to allow us to pay the minimum quarterly distributions on our common and subordinated units. While we believe, based on our financial forecast and related assumptions, that we will have sufficient cash to enable us to pay the full minimum quarterly distribution on all of our common and subordinated units for the twelve months ending September 30, 2015, we may be unable to pay the full minimum quarterly distribution or any amount on our common units.

Our Ability to Grow Depends on Our Ability to Access External Expansion Capital

Because we distribute all of our available cash, our growth may not be as fast as the growth of businesses that reinvest their available cash to expand ongoing operations. We expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion and investment capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. To the extent we issue additional units in connection with any acquisitions or expansion or investment capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may affect the available cash that we have to distribute on each unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional borrowings or other debt by us to finance our growth strategy would result in increased interest expense, which in turn may affect the available cash that we have to distribute to our unitholders.

Initial Distribution Rate

The amount of the minimum quarterly distribution is $0.4125 per unit, or $1.65 per unit per year. The amount of available cash from operating surplus, which we also refer to as cash available for distributions, needed to pay the minimum quarterly distribution on all of the common units and subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering for one quarter and for four quarters will be approximately:

 

     No Exercise of the Underwriters’
Option
 
     Number
of
Units
     Distributions  
        One
Quarter
     Four
Quarters
 

Common units

     9,342,692       $ 3,853,860       $ 15,415,442   

Subordinated units

     9,342,692         3,853,860         15,415,442   

General Partner interest(1)

     381,334         157,300         629,201   
  

 

 

    

 

 

    

 

 

 

Total

     19,066,718       $ 7,865,020       $ 31,460,085   
  

 

 

    

 

 

    

 

 

 

 

(1) The number of general partner units is determined by multiplying the total number of units deemed to be outstanding (i.e., the total number of common and subordinated units outstanding divided by 98.0%) by the general partner’s 2.0% general partner interest.

 

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Upon completion of this offering, our board of directors will adopt a policy pursuant to which we will pay an initial quarterly distribution of $0.4125 per unit for each complete quarter. Beginning with the quarter ending December 31, 2014, we will distribute, within 45 days after the end of each quarter, all of our available cash to unitholders of record on the applicable record date. We will adjust our first distribution for the period from the closing of this offering through December 31, 2014 based on the actual length of the period.

During the subordination period, before we make any quarterly distributions to subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions from prior quarters. Please read “How We Make Cash Distributions—Subordination Period.” The amount of the minimum quarterly distribution is $0.4125 per unit, or $1.65 per unit per year. We cannot guarantee, however, that we will pay the minimum quarterly distribution or any amount on the common units in any quarter.

In general, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. The general partner’s initial 2.0% interest in these distributions, however, may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its initial 2.0% general partner interest. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest.

Forecasted Results of Operations for the Twelve Months Ending September 30, 2015

In this section, we present in detail the basis for our belief that we will be able to pay our minimum quarterly distribution on all of our outstanding units for the twelve months ending September 30, 2015. We present two tables, consisting of:

 

    Forecasted Results of Operations for the twelve months ending September 30, 2015; and

 

    Forecasted Cash Available for Distribution for the twelve months ending September 30, 2015, as well as the significant assumptions upon which the forecast is based.

We do not as a matter of course make public projections as to future sales, earnings, or other results. However, management has prepared the prospective financial information set forth below to present forecasted results of operations and forecasted cash available for distribution. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, our management. Our independent auditors have neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, our independent auditors do not express an opinion or any other form of assurance with respect thereto. Our independent auditors’ report included in this prospectus relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

We present below a forecast of our expected results of operations for the twelve months ending September 30, 2015. Our forecast presents, to the best of our knowledge and belief, our expected results of operations for the forecast period. Although, we anticipate that we may exercise some or all of our options to purchase from Navios Maritime Acquisition the Nave Celeste, the C. Dream, the Nave Galactic, the Nave

 

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Quasar, the Nave Buena Suerte, the Nave Neutrino and the Nave Electron, the timing of any such purchases is uncertain and each such purchase is subject to a number of conditions, including reaching an agreement with Navios Maritime Acquisition regarding the fair market value of the vessel and the availability of financing, which we anticipate would be from external sources. As a result, our forecast does not reflect any expected results of operations or related financing of any of such vessels.

Our financial forecast reflects our judgment, as of the date of this prospectus, of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2015. Our financial forecast is based on assumptions that we believe to be reasonable with respect to the forecast period as a whole. The assumptions and estimates used in the financial forecast are inherently uncertain and represent those that we believe are significant to our financial forecast. We believe that we have a reasonable objective basis for those assumptions. To the extent that there is a shortfall during any quarter in the forecast period, we believe we would be able to make working capital borrowings to pay distributions in such quarter and would be able to repay such borrowings in a subsequent quarter, because we believe the total cash available for distribution for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders. We believe our actual results of operations will approximate those reflected in our financial forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our financial forecast and the actual results and those differences could be material. Our operations are subject to numerous risks that are beyond our control. If the financial forecast is not achieved, we may not be able to pay cash distributions on our units at the initial distribution rate stated in our cash distribution policy or at all.

Our forecast of our results of operations is a forward-looking statement and should be read together with the historical combined carve-out financial statements of Navios Maritime Midstream Partners Predecessor and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The financial forecast has been prepared by and is the responsibility of our management. However, our management has prepared the financial forecast set forth below in support of our belief that we will have sufficient cash available to allow us to pay the minimum quarterly distribution on all of our outstanding units during the forecast period. In addition, in the view of our management, the accompanying financial forecast was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of our knowledge and belief, the expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the financial forecast.

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements included under the headings “Forward-Looking Statements” and “Risk Factors” included elsewhere in this prospectus. Any of the risks discussed in this prospectus or unanticipated events could cause our actual results of operations, cash flows and financial condition to vary significantly from the financial forecast and such variations may be material. Prospective investors are cautioned to not place undue reliance on the financial forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

We are providing the financial forecast in support of our belief that we will have sufficient cash available to allow us to pay cash distributions on all of our units for each quarter in the twelve months ending September 30, 2015 at our stated initial distribution rate. See “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update the financial forecast to reflect events or circumstances after the date of this prospectus, even in the event that any or all of the underlying assumptions are shown to be in error. Therefore, we caution you not to place undue reliance on this information.

 

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For comparison purposes, we have included the historical results of operations for the year ended December 31, 2013 and for the twelve months ended September 30, 2014, and the pro forma results of operations for the year ended December 31, 2013 adjacent to our forecast for the twelve months ending September 30, 2015, in the table below.

NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

FORECASTED RESULTS OF OPERATIONS

 

(in thousands of U.S. dollars)

  

Historical

Year Ended
December 31,

2013

   

Historical

Twelve Months
Ended
September 30,

2014

   

Pro forma
Year Ended
December 31,
2013

   

Forecast
Twelve
Months
Ending
September 30,
2015

 
           (unaudited)     (unaudited)     (unaudited)  

Revenue

   $    63,659      $    63,575      $ 63,659      $ 63,538  

Time Charter expenses

     (900     (790     (900     (664

Direct vessel expenses

     (1,919     (1,473     (1,919     (1,156

Management fees

     (14,600     (14,350     (13,870     (13,870

General and administrative expenses

     (866     (1,025     (2,000     (2,000

Depreciation and amortization

     (19,508     (19,508     (19,508     (19,508

Interest expenses and finance cost

     (31,249     (28,861     (4,258     (4,196

Loss on bond extinguishment

     (23,188     (23,188     —         —    

Other income/ (expense), net

     (74     (49     (74 )     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/ income

   $ (28,645 )    $ (25,669 )    $ 21,130      $ 22,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to common units:

       $ 10,354      $ 10,850   

Earnings per:

        

Common unit (basic and diluted)

       $ 1.11      $ 1.16   

Please read the accompanying summary of significant accounting policies and forecast assumptions.

Forecast Assumptions and Considerations

Basis of Presentation

The accompanying financial forecast and related notes present our forecasted results of operations for the twelve months ending September 30, 2015, based on the assumption that:

 

    we will issue to Navios Maritime Acquisition 9,342,692 subordinated units and 1,242,692 common units, representing a 55.5% limited partner interest in us;

 

    we will issue to our general partner, a wholly owned subsidiary of Navios Maritime Acquisition, general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights, which will entitle Navios Maritime Acquisition to increasing percentages of the cash we distribute in excess of $0.4744 per unit per quarter;

 

    we will sell 8,100,000 common units to the public in this offering, representing a 42.5% limited partner interest in us;

 

    we will make a payment of $258.9 million to Navios Maritime Acquisition as partial consideration for the interest in the subsidiaries that own the vessels in our initial fleet;

 

    we will incur estimated general and administrative expenses of $2.0 million annually.

 

    the vessels and other net assets assumed will be accounted for at their historical carrying values.

 

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Summary of Significant Accounting Policies and Sources of Estimation Uncertainty

A summary of significant accounting policies is set out in Note 2 to the historical combined carve-out financial statements included elsewhere in this prospectus.

Summary of Significant Forecast Assumptions

We expect to generate cash available for distribution ratably over the twelve months ending September 30, 2015.

Vessels. The forecast assumes 364 days of operations for the each of the four vessels in our fleet, under their current time charters. We have assumed that we will not make any acquisitions during the forecast period.

Revenue: Our forecast assumptions are based on contracted daily charter rates for each vessel (as set forth in the table below) and 364 days per calendar year of expected operations for each vessel under time charter. The rates presented in the table below are net of both address and brokers’ commissions but for presentation purposes, brokers’ commissions are included in the line “Time charter expenses” in the forecast results of operations for the twelve months ending September 30, 2015. All of the vessels in our fleet are hired out under time charters and we intend to continue to hire out our vessels under time charters. The forecast assumes no profit sharing for the twelve months ending September 30, 2015.

In determining the forecasted number of unscheduled off-hire days, we have assumed that unscheduled off-hire for our vessels will be one day per vessel which represents utilization of 99.7%. The Partnership’s historical fleet utilization was 100% and 99.8% for the year ended December 31, 2013 and the nine month period ended September 30, 2014, respectively. Our vessels are subject to regularly scheduled drydocking and special surveys which are carried out every 30 and 60 months, respectively. We do not expect any drydocking or special survey in the forecast period. The amount of actual off-hire time depends upon, among other things, the time a vessel spends in drydocking for repairs, maintenance or inspection, equipment breakdowns or delays due to accidents, crewing strikes, certain vessel detentions or similar problems as well as failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.

 

Vessels

   Type      Built/
Delivery
Date
     DWT      Net
Charter
Rate(1)
     Profit Share to Owner      Expiration
Date(2)

Shinyo Ocean

     VLCC         2001         281,395         38,400       50% above $ 43,500(3)       January 2017

Shinyo Kannika

     VLCC         2001         287,175         38,025       50% above $ 44,000(4)       February 2017

Shinyo Saowalak

     VLCC         2010         298,000         48,153       35% above $ 54,388(5)       May 2025
               40% above $ 59,388(5)      
               50% above $ 69,388(5)      

Shinyo Kieran

     VLCC         2011         297,066         48,153       35% above $ 54,388(5)       June 2026
               40% above $ 59,388(5)      
               50% above $ 69,388(5)      

 

(1) Net time charter-out rate per day in dollars (net of commissions).
(2) Estimated dates assuming midpoint of redelivery by charterers.
(3) Calculated semi-annually on the basis of the daily values of the Baltic Exchange Tanker Route AG/Japan for the past two quarters adjusted for the vessel’s specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(4) Calculated semi-annually on the basis of the weighted average of the daily values of four Baltic Exchange Tanker Routes for the past two quarters adjusted for certain agreed specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(5) Calculated annually on the basis of the weighted average of the daily values of four Baltic Exchange Tanker Routes for the past four quarters adjusted for certain agreed specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.

 

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Management fees. Our forecast assumes vessel operating expenses per each owned VLCC vessel will be equal to the number of days in the year, multiplied by $9,500, which is in line with the terms of the existing Management Agreement between Navios Maritime Holdings and Navios Maritime Acquisition, dated May 28, 2010 (the “Existing Management Agreement”). At the closing of this offering, we will enter into a new five-year management agreement with Navios Maritime Holdings (the “New Management Agreement”) on similar terms to the Existing Management Agreement, pursuant to which Navios Maritime Holdings will provide commercial and technical management services to our vessels for a daily fee of $9,500 per VLCC tanker vessel for a term of two years. Under the New Management Agreement, we will be required to pay additional fees to Navios Maritime Holdings for additional costs incurred by it in some circumstances. Please read “Certain Relationships and Related Party Transactions-Management Agreement.” We have assumed we will incur no additional fees during the forecast period. As a result, this forecast could vary significantly if any additional fees are incurred.

Direct vessel expenses. Direct vessel expenses, comprise of the amortization of dry dock and special survey costs, of certain vessels of our fleet. Our forecast assumes that we will incur amortization expense of $1.2 million for the twelve months ending September 30, 2015.

Depreciation and Amortization. Depreciation of the vessels is based on their historical cost to the vessel-owned subsidiaries (which consists of the contract price and any material expenses incurred upon acquisition, improvements and delivery expenses). Depreciation is calculated using the straight-line method over the useful life of the vessels, after considering the estimated residual value. Management estimates the useful life of the vessels to be 25 years from the vessel’s original construction. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is re-estimated to end at the date such regulations become effective.

Amortization of intangible assets is based on their valuation following their acquisition by Navios Maritime Acquisition in September 2010, in a process that included the use of independent appraisers. Our forecast assumes amortization expense on the intangible assets (favorable lease terms associated with our charter-out contracts). Amortization is calculated using straight-line method over the useful life of the favorable leases (ranging from 6.3 to 15 years at inception). Our forecast assumes calculation of amortization expense for the favorable leases over the useful life of the contracts associated with them.

General and Administrative Expenses. Our forecast assumes we will incur $2.0 million of total general and administrative expenses per year. We have assumed that the expenses to be incurred for estimated incremental general and administrative expenses, including costs associated with annual reports to unitholders, investor relations, registrar and transfer agent’s fees, directors and officer liability insurance costs and directors compensation and travel expenses, will be $2.0 million on an annual basis for each period.

At the closing of this offering, we will enter into an administrative services agreement (the “New Administrative Services Agreement”) with Navios Maritime Holdings, pursuant to which Navios Maritime Holdings will provide certain administrative management services to us. We expect the terms of this agreement to be in line with the existing general and administrative services agreement, between Navios Maritime Holdings and Navios Maritime Acquisition, dated May 28, 2010 (the “Existing Administrative Services Agreement”) pursuant to which Navios Maritime Holdings provides certain administrative management services to Navios Maritime Acquisition which include: bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. The New Administrative Services Agreement will have an initial term of five years from the closing date of this offering. We will reimburse Navios Maritime Holdings for reasonable costs and expenses incurred in connection with the provision of these services.

Interest Expense. We have made a preliminary assumption, that upon the closing of the offering, we will borrow $126.0 million under our new credit facility at an interest rate of 3.24%. In connection with this debt, $1.4 million of loan arrangement fees will be capitalized. We have assumed that such capitalized loan arrangement

 

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fees will be amortized, using the effective interest method, over the estimated maturity of the new credit facility, which is assumed to be five years. Annual repayments are assumed to be $10.5 million. Amortization of capitalized loan arrangement fees is assumed to amount to $0.3 million.

Interest Income. We have assumed that any cash surplus balance will not earn any interest during the forecast period.

Maintenance and replacement capital expenditures. Our partnership agreement requires our board of directors to deduct from operating surplus each quarter estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, in order to reduce disparities in operating surplus caused by fluctuating maintenance and replacement capital expenditures, such as drydocking and vessel replacement. The actual cost of replacing the vessels in our fleet will depend on a number of factors, including prevailing market conditions, hire rates and the availability and cost of financing at the time of replacement. Our board of directors, with the approval of the conflicts committee, may determine that one or more of our assumptions should be revised, which could cause our board of directors to increase the amount of estimated maintenance and replacement capital expenditures. We may elect to finance some or all of our maintenance and replacement capital expenditures through the issuance of additional common units, which could be dilutive to our existing unitholders. See “Risk Factors—Risks Inherent in Our Business—We must make substantial capital expenditures to maintain the operating capacity of our fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted”.

Maintenance Capital Expenditures. No drydocking costs were assumed for the twelve months ending September 30, 2015, because the vessels are expected to be drydocked in the fourth quarter of 2015 and in 2016. Our initial annual estimated drydocking capital expenditure reserve will be $1.5 million. The estimation is based on assumptions and estimates regarding the remaining useful lives of the vessels, a relative net investment rate, drydocking and special survey costs based on current industry data.

Replacement Capital Expenditures. Because of the substantial capital expenditures we are required to make to maintain our fleet over time, our initial annual estimated replacement capital expenditures for estimating maintenance and replacement capital expenditures will be $6.99 million per year, for replacing our VLCCs at the end of their useful lives. The future vessel replacement is based on assumptions and estimates regarding the remaining useful lives of the vessels, a relative net investment rate, vessel replacement values based on current market conditions and residual value of the vessels at the end of their useful lives based on current steel prices.

Regulatory, Industry and Economic Factors. We forecast for the twelve months ending September 30, 2015 based on the following assumptions related to regulatory, industry and economic factors:

 

    no material nonperformance or credit-related defaults by suppliers, customers or vendors;

 

    no new regulation or interpretation of existing regulations that, in either case, would be materially adverse to our business;

 

    no material accidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated events;

 

    no major adverse change in the markets in which we operates resulting from production disruptions, reduced demand for crude oil or significant changes in the market prices of crude oil; and

 

    no material changes to market, regulatory and overall economic conditions or in prevailing interest rates.

 

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Forecasted Cash Available for Distribution

The table below sets forth our calculation of forecasted cash available for distribution to our unitholders and general partner based on the Forecasted Results of Operations set forth above. Based on the financial forecast and related assumptions, we forecast that our cash available for distribution generated during the twelve months ending September 30, 2015 will be approximately $34.6 million. This amount would be sufficient to pay 100% of the minimum quarterly distribution of $0.4125 per unit on all of our common units and subordinated units for the four quarters ending September 30, 2015.

You should read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” included as part of the financial forecast for a discussion of the material assumptions underlying our forecasted cash available for distribution that is included in the table below. Our forecast is based on those material assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed in our financial forecast are those that we believe are significant to generate the forecasted cash available for distribution. If our estimate is not achieved, we may not be able to pay distributions on the common units at the initial distribution rate of $0.4125 per unit per quarter ($1.65 per unit on an annualized basis). Our financial forecast and the forecast of cash available for distribution set forth below have been prepared by our management. This calculation represents available cash from operating surplus generated during the period and excludes any cash from working capital borrowings, capital expenditures and cash on hand on the closing date.

The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, our management. Our independent auditors have neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, our independent auditors do not express an opinion or any other form of assurance with respect thereto. Our independent auditors’ report included in this prospectus relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

When considering our forecast of cash available for distribution for the twelve months ending September 30, 2015, you should keep in mind the risk factors and other cautionary statements under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our results of operations to vary significantly from those set forth in the financial forecast and the forecast of cash available for distribution set forth below.

 

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For comparison purposes, we have included the historical results of operations for the twelve months ended September 30, 2014, adjacent to our forecast for the twelve months ending September 30, 2015, in the table below.

NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

FORECASTED CASH AVAILABLE FOR DISTRIBUTION

 

     Historical     Historical     Pro Forma     Forecast  
     Year Ended
December 31, 2013
    Last Twelve
Months Ended
September 30,
2014
    Year Ended
December 31,
2013
    Twelve Months
Ending
September 30,
2015(1)
 
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
     (in thousands of U.S. dollars, except per unit amounts)  

Net (loss)/ income

   $ (28,645   $ (25,669   $ 21,130      $ 22,144  

Direct vessel expenses

     1,919        1,473        1,919        1,156  

Depreciation and amortization

     19,508        19,508        19,508        19,508  

Interest expenses and finance cost

     31,249        28,861        4,258        4,196  

Loss on bond extinguishment (non-cash)

     5,442        5,442        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $    29,473      $    29,615      $    46,815      $ 47,004  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments for cash items, estimated maintenance and replacement capital expenditures:

        

Cash interest expense

     (31,695     (30,407     (3,968)        (3,906 )

Maintenance capital expenditure reserves(2)

     (1,504     (1,504     (1,504     (1,504 )

Replacement capital expenditure reserves(2)

     (6,988     (6,988     (6,988     (6,988 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution

   $ (10,714   $ (9,284   $ 34,355      $   34,606  

Expected distributions:

        

Distributions per unit

         $  1.65   

Distributions to our common unitholders(3)

           13,365   

Distributions to Navios Maritime Acquisition—common units(3)

           2,050   

Distributions to Navios Maritime Acquisition—subordinated units

           15,415   

Distributions to general partner units

           630   

Total distributions(4)

         $ 31,460   

Excess (shortfall)

         $ 3,146   

Annualized minimum quarterly distribution per unit

         $ 1.65   

Aggregate distributions based on annualized minimum quarterly distribution

         $ 31,460   

Percent of minimum quarterly distributions payable to common unitholders

           100%  

Percent of minimum quarterly distributions payable to subordinated unitholder

           100%   

 

(1) The forecast is based on the assumptions set forth in “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions”.
(2) Our partnership agreement requires that an estimate of the maintenance and replacement capital expenditures necessary to maintain our asset base be subtracted from operating surplus each quarter, as opposed to amounts actually spent. See “How We Make Cash Distributions—Operating Surplus and Capital Surplus—Capital Expenditures”.
(3) Assumes the underwriters’ option is not exercised.
(4) Represents the amount required to fund distributions to our unitholders and our general partner for four quarters based upon our minimum quarterly distribution rate of $0.4125 per unit.

 

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Forecast of Compliance with Debt Covenants. Our ability to make distributions could be affected if we do not remain in compliance with the restrictions and covenants of our financing agreements. Our fleet is subject to financing agreements, which we anticipate will be amended in connection with this offering. We have assumed that we will be in compliance with all of the covenants in such financing agreements during the forecast period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a further description of our financing agreements, including these financial covenants.

 

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HOW WE MAKE CASH DISTRIBUTIONS

Distributions of Available Cash

General

Within approximately 45 days after the end of each quarter, beginning with the quarter ending December 31, 2014, we will distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of this offering through December 31, 2014 based on the actual length of the period.

Definition of Available Cash

We define available cash in the glossary, and it generally means, for each fiscal quarter, all cash on hand at the end of the quarter:

 

    less the amount of cash reserves established by our board of directors to:

 

    provide for the proper conduct of our business (including reserves for future capital expenditures and for our anticipated credit needs);

 

    comply with applicable law, any of our debt instruments, or other agreements; or

 

    provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;

 

    plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Working capital borrowings are generally borrowings that are made under any revolving credit or similar agreement used solely for working capital purposes or to pay distributions to partners.

Intent to Distribute the Minimum Quarterly Distribution

We intend to distribute to the holders of common units and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.4125 per unit, or $1.65 per unit per year, to the extent we have sufficient cash on hand to pay the distribution after we establish cash reserves and pay fees and expenses. The amount of available cash from operating surplus needed to pay the minimum quarterly distribution for one quarter on all units outstanding immediately after this offering and the related distribution on the 2.0% general partner interest is approximately $7.9 million. There is no guarantee that we will pay the minimum quarterly distribution on the common units and subordinated units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement. We will be prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default is existing, under our new credit agreement that we will enter into in connection with this offering.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as either “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

 

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Definition of Operating Surplus

We define operating surplus in the glossary, and for any period it generally means:

 

    $20.0 million; plus

 

    all of our cash receipts (including our proportionate share of cash receipts of certain subsidiaries we do not wholly own) after the closing of this offering, excluding cash from (1) borrowings, other than working capital borrowings, (2) sales of equity and debt securities, (3) sales or other dispositions of assets outside the ordinary course of business, (4) termination of interest rate swap agreements, (5) capital contributions or (6) corporate reorganizations or restructurings; plus

 

    working capital borrowings (including our proportionate share of working capital borrowings for certain subsidiaries we do not wholly own) made after the end of a quarter but before the date of determination of operating surplus for the quarter; plus

 

    interest paid on debt incurred and cash distributions paid on equity securities issued, in each case (and including our proportionate share of such interest and cash distributions paid by certain subsidiaries we do not wholly own), to finance all or any portion of the construction, replacement or improvement of a capital asset such as a vessel during the period from such financing until the earlier to occur of the date the capital asset is put into service or the date that it is abandoned or disposed of; plus

 

    interest paid on debt incurred and cash distributions paid on equity securities issued, in each case (and including our proportionate share of such interest and cash distributions paid by certain subsidiaries we do not wholly own), to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the construction projects described in the immediately preceding bullet; less

 

    all of our operating expenditures (including our proportionate share of operating expenditures by certain subsidiaries we do not wholly own) after the closing of this offering and the repayment of working capital borrowings, but not (1) the repayment of other borrowings, (2) actual maintenance and replacement capital expenditures or expansion capital expenditures or investment capital expenditures, (3) transaction expenses (including taxes) related to interim capital transactions or (4) distributions; less

 

    estimated maintenance and replacement capital expenditures and the amount of cash reserves (including our proportionate share of cash reserves for certain subsidiaries we do not wholly own) established by our board of directors to provide funds for future operating expenditures.

If a working capital borrowing, which increases operating surplus, is not repaid during the 12-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will not be treated as a reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

As described above, operating surplus includes a provision that will enable us, if we choose, to distribute as operating surplus up to $20.0 million of cash we receive in the future from non-operating sources, such as asset sales, issuances of securities and long-term borrowings, that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity securities or interest payments on debt in operating surplus would be to increase operating surplus by the amount of any such cash distributions or interest payments. As a result, we may also distribute as operating surplus up to the amount of any such cash distributions or interest payments of cash we receive from non-operating sources.

Capital Expenditures

For purposes of determining operating surplus, maintenance and replacement capital expenditures are those capital expenditures required to maintain over the long term the operating capacity of or the revenue generated

 

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by our capital assets, and expansion capital expenditures are those capital expenditures that increase the operating capacity of or the revenue generated by our capital assets. To the extent, however, that capital expenditures associated with acquiring a new vessel increase the revenues or the operating capacity of our fleet, those capital expenditures would be classified as expansion capital expenditures.

Investment capital expenditures are those that are neither maintenance and replacement capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes.

Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of equity securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes.

Examples of maintenance and replacement capital expenditures include capital expenditures associated with drydocking, modifying an existing vessel or acquiring a new vessel to the extent such expenditures are incurred to maintain the operating capacity of or the revenue generated by our fleet. Maintenance and replacement capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued to finance the construction of a replacement vessel and paid during the construction period, which we define as the period beginning on the date that we enter into a binding construction contract and ending on the earlier of the date that the replacement vessel commences commercial service or the date that the replacement vessel is abandoned or disposed of. Debt incurred to pay or equity issued to fund construction period interest payments, and distributions on such equity, will also be considered maintenance and replacement capital expenditures.

Because our maintenance and replacement capital expenditures can be very large and vary significantly in timing from period to period, the amount of our actual maintenance and replacement capital expenditures may differ substantially from period to period, which could cause similar fluctuations in the amounts of operating surplus, adjusted operating surplus, and available cash for distribution to our unitholders if we subtracted actual maintenance and replacement capital expenditures from operating surplus each quarter. Accordingly, to eliminate the effect on operating surplus of these fluctuations, our partnership agreement will require that an amount equal to an estimate of the average quarterly maintenance and replacement capital expenditures necessary to maintain the operating capacity of or the revenue generated by our capital assets over the long term be subtracted from operating surplus each quarter, as opposed to the actual amounts spent. In the partnership agreement, we refer to these estimated maintenance and replacement capital expenditures to be subtracted from operating surplus as “estimated maintenance capital expenditures.” The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our board of directors at least once a year, provided that any change must be approved by our conflicts committee. The estimate will be made at least annually and whenever an event occurs that is likely to result in a material adjustment to the amount of our maintenance and replacement capital expenditures, such as a major acquisition or the introduction of new governmental regulations that will affect our fleet. For purposes of calculating operating surplus, any adjustment to this estimate will be prospective only. For a discussion of the amounts we have allocated toward estimated maintenance and replacement capital expenditures, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The use of estimated maintenance and replacement capital expenditures in calculating operating surplus will have the following effects:

 

    it will reduce the risk that actual maintenance and replacement capital expenditures in any one quarter will be large enough to make operating surplus less than the minimum quarterly distribution to be paid on all the units for that quarter and subsequent quarters;

 

    it may reduce the need for us to borrow to pay distributions;

 

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    it will be more difficult for us to raise our distribution above the minimum quarterly distribution and pay incentive distributions to our general partner; and

 

    it will reduce the likelihood that a large maintenance and replacement capital expenditure in a period will prevent Navios Maritime Acquisition from being able to convert some or all of its subordinated units into common units since the effect of an estimate is to spread the expected expense over several periods, mitigating the effect of the actual payment of the expenditure on any single period.

Definition of Capital Surplus

We also define capital surplus in the glossary, and it generally will be generated only by:

 

    borrowings other than working capital borrowings;

 

    sales of debt and equity securities; and

 

    sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business or non-current assets sold as part of normal retirements or replacements of assets.

Characterization of Cash Distributions

We will treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since we began operations equals the operating surplus as of the most recent date of determination of available cash. We will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus includes a provision that will enable us, if we choose, to distribute as operating surplus up to $20.0 million of cash we receive in the future from non-operating sources, such as asset sales, issuances of securities and long-term borrowings, that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Subordination Period

General

During the subordination period, which we define below and in the glossary, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.4125 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units.

Definition of Subordination Period

We define the subordination period in the glossary. Except as described below under “—Early Termination of Subordination Period,” the subordination period will extend until the first day of any quarter, beginning after September 30, 2017, that each of the following tests are met:

 

    distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

    the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2.0% general partner interest during those periods; and

 

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    there are no outstanding arrearages in payment of the minimum quarterly distribution on the common units.

If the unitholders remove our general partner without cause, the subordination period may end before September 30, 2017.

Early Termination of Subordination Period

The subordination period will automatically terminate and the subordinated units will convert into common units on a one-for-one basis if the following tests are met:

 

    distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $2.475 (150% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding the date of determination; and

 

    the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding the date of determination equaled or exceeded the sum of a distribution of $2.475 per unit (150% of the annualized minimum quarterly distribution) on all of the outstanding common units, subordinated units and general partner units on a fully diluted basis; and

 

    there are no outstanding arrearages in payment of the minimum quarterly distribution on the common units.

For purposes of determining whether sufficient adjusted operating surplus has been generated under these conversion tests, the conflicts committee may adjust adjusted operating surplus upwards or downwards if it determines in good faith that the estimated amount of maintenance and replacement capital expenditures used in the determination of operating surplus was materially incorrect, based on circumstances prevailing at the time of original determination of the estimate.

Definition of Adjusted Operating Surplus

We define adjusted operating surplus in the glossary, and for any period it generally means:

 

    operating surplus generated with respect to that period; less

 

    any net increase in working capital borrowings (including our proportionate share of any changes in working capital borrowings of certain subsidiaries we do not wholly own) with respect to that period; less

 

    any net reduction in cash reserves for operating expenditures (including our proportionate share of cash reserves of certain subsidiaries we do not wholly own) with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

    any net decrease in working capital borrowings (including our proportionate share of any changes in working capital borrowings of certain subsidiaries we do not wholly own) with respect to that period; plus

 

    any net increase in cash reserves for operating expenditures (including our proportionate share of cash reserves of certain subsidiaries we do not wholly own) with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods.

 

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Effect of Expiration of the Subordination Period

Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the unitholders remove our general partner other than for cause and units held by our general partner and its affiliates are not voted in favor of such removal:

 

    the subordination period will end and each subordinated unit will immediately convert into one common unit;

 

    any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and

 

    our general partner will have the right to convert its general partner interest and, if any, its incentive distribution rights into common units or to receive cash in exchange for those interests.

Distributions of Available Cash From Operating Surplus During the Subordination Period

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

    first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

    second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

    third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—Incentive Distribution Rights” below.

The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of securities.

Distributions of Available Cash From Operating Surplus After the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

    first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—Incentive Distribution Rights” below.

The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of securities.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.

 

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Navios Maritime Holdings will have a ten-year option to purchase a minimum of 25% of the general partner interest held by the general partner, the incentive distribution rights held by the general partner and/or the membership interests in the general partner from Navios Maritime Acquisition, each at fair market value. See “The Partnership Agreement—Transfer of Incentive Distribution Rights” and “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Option to Purchase General Partner Interest.” Except for transfers of incentive distribution rights to an affiliate or another entity as part of our general partner’s merger or consolidation with or into, or sale of substantially all of its assets to such entity and Navios Maritime Holdings’ ten-year option to purchase incentive distribution rights, subject to certain restrictions, the approval of a majority of our common units (excluding common units held by our general partner and its affiliates), voting separately as a class, generally is required for a transfer of the incentive distribution rights to a third party prior to September 30, 2019. Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights.

If for any quarter:

 

    we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

    we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

 

    then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

    first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $0.4744 per unit for that quarter (the “first target distribution”);

 

    second, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to the holders of the incentive distribution rights, until each unitholder receives a total of $0.5156 per unit for that quarter (the “second target distribution”);

 

    third, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to the holders of the incentive distribution rights, until each unitholder receives a total of $0.6188 per unit for that quarter (the “third target distribution”); and

 

    thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to the holders of the incentive distribution rights.

In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution. The percentage interests set forth above assume that our general partner maintains its 2.0% general partner interest and has not transferred the incentive distribution rights and that we do not issue additional classes of equity securities.

 

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Percentage Allocations of Available Cash From Operating Surplus

The following table illustrates the percentage allocations of the additional available cash from operating surplus among the unitholders and our general partner up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the unitholders and our general partner in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount,” until available cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests shown for our general partner assume that our general partner maintains its 2.0% general partner interest and assume our general partner has not transferred the incentive distribution rights.

 

    

Total Quarterly

Distribution
Total Amount

   Marginal Percentage
Interest
in Distributions
 
        Unitholders     General

Partner
    Holders of
IDRs
 

Minimum Quarterly Distribution

   $0.4125      98.0     2.0     0

First Target Distribution

  

up to $0.4744

     98.0     2.0     0

Second Target Distribution

  

above $0.4744

up to $0.5156

     85.0     2.0     13.0

Third Target Distribution

  

above $0.5156

up to $0.6188

     75.0     2.0     23.0

Thereafter

   above $0.6188      50.0     2.0     48.0

Distributions From Capital Surplus

How Distributions From Capital Surplus Will Be Made

We will make distributions of available cash from capital surplus, if any, in the following manner:

 

    first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price;

 

    second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

    thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.

The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional clauses or equity securities.

Effect of a Distribution From Capital Surplus

The partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this offering, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the distribution had to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution, after any of these distributions are made, it may be easier

 

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for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we reduce the minimum quarterly distribution and the target distribution levels to zero, we will then make all future distributions from operating surplus, with     % being paid to the holders of units and     % to our general partner. The percentage interests shown assume that our general partner maintains its 2.0% general partner interest and assume our general partner has not transferred the incentive distribution rights.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

    the minimum quarterly distribution;

 

    the target distribution levels; and

 

    the initial unit price.

For example, if a two-for-one split of the common and subordinated units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine our subordinated units or subdivide our subordinated units, using the same ratio applied to the common units. We will not make any adjustment by reason of the issuance of additional units for cash or property.

Distributions of Cash Upon Liquidation

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will apply the proceeds of liquidation in the manner set forth below.

If, as of the date three trading days prior to the announcement of the proposed liquidation, the average closing price for our common units for the preceding 20 trading days (or the current market price) is greater than the sum of:

 

    any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; plus

 

    the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);

 

    then the proceeds of the liquidation will be applied as follows:

 

    first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the current market price of our common units;

 

    second, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each subordinated unit, an amount equal to the current market price of our common units; and

 

    thereafter, 50.0% to all unitholders, pro rata, 48.0% to holders of incentive distribution rights and 2.0% to our general partner.

 

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If, as of the date three trading days prior to the announcement of the proposed liquidation, the current market price of our common units is equal to or less than the sum of:

 

    any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; plus

 

    the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);

 

    then the proceeds of the liquidation will be applied as follows:

 

    first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);

 

    second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

    third, 98.0% to the subordinated unitholders and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation); and

 

    thereafter, 50.0% to all unitholders, pro rata, 48.0% to holders of incentive distribution rights and 2.0% to our general partner.

The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

The following table presents in each case for the periods and at the dates indicated summary historical combined financial data, unaudited pro forma financial data and operating data of Navios Maritime Midstream Partners Predecessor. We have derived the summary historical combined financial data for the years ended December 31, 2013 and 2012 from our audited combined financial statements appearing elsewhere in this prospectus. The summary historical combined financial data as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013 are derived from our unaudited combined financial statements appearing elsewhere in this prospectus. The combined financial statements included in the prospectus have been carved-out of the consolidated financial statements of Navios Maritime Acquisition, which owned the VLCCs that we will acquire in connection with this offering during the periods ended September 30, 2014, December 31, 2013 and 2012. Results of operations have been included from the respective dates that the vessel-owning subsidiaries were acquired. Navios Maritime Acquisition’s shipping interests and other assets, liabilities, revenues and expenses that do not relate to the vessel-owning subsidiaries to be acquired by us are not included in our combined financial statements. Our financial position, results of operations and cash flows reflected in our combined financial statements include all expenses allocable to our business, but may not be indicative of those that would have been achieved had we operated as a public entity for all periods presented or of future results.

We have derived the selected pro forma financial data of Navios Maritime Midstream Partners L.P. as of September 30, 2014 and for the year ended December 31, 2013 and for the nine months ended September 30, 2014 from our unaudited pro forma combined financial statements included elsewhere in this prospectus. The pro forma income statement data for the year ended December 31, 2013 and the nine months ended September 30, 2014, assumes this offering and the related transactions occurred on January 1, 2013. The pro forma balance sheet assumes this offering and the related transactions occurred on September 30, 2014. The pro forma financial data may not be comparable to the historical financial data for the reasons set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A more complete explanation of the pro forma data can be found in our unaudited pro forma combined financial statements and accompanying notes included elsewhere in this prospectus.

 

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The following table should be read together with, and is qualified in its entirety by reference to, the historical combined financial statements, unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Pro Forma     Pro Forma     Historical  
(In thousands of U.S.
dollars, except fleet
data)
  Nine Months
Ended
September 30, 2014
    Year Ended
December 31, 2013
    Nine Months
Ended
September 30, 2014
    Nine Months
Ended
September 30, 2013
    Year Ended
December 31, 2013
    Year Ended
December 31, 2012
 

Revenue

  $ 47,526      $ 63,659      $ 47,526      $ 47,610      $    63,659      $ 64,059   

Time charter expenses

    (579     (900     (579     (689     (900     (1,185

Direct vessel expenses

    (994     (1,919     (994     (1,440     (1,919     (1,898

Management fees

    (10,374     (13,870     (10,670     (10,920     (14,600     (14,640

General and administrative expenses

    (1,500     (2,000     (756     (597     (866     (947

Depreciation and amortization

    (14,632     (19,508     (14,632     (14,632     (19,508     (20,211

Interest expenses and finance cost

    (2,951     (4,258     (21,343     (23,731     (31,249     (31,803

Loss on bond extinguishment

    —          —          —          —          (23,188     —     

Other income

    5        —          5        —          —          267   

Other expense

    —          (74     —          (20     (74     (15
 

 

 

 

Net income /(loss)

  $   16,501      $ 21,130      $ (1,443   $ (4,419   $ (28,645   $ (6,373
 

 

 

 

Pro forma income per common unit

  $ 0.87      $ 1.11           

 

    Pro Forma     Historical  
    As of
September 30, 2013
    As of
September 30, 2014
    As of
December 31, 2013
    As of
December 31, 2012
 

Balance Sheet Data (at period end)

       

Total current assets

  $ 20,974      $ 81,693      $ 45,944      $ 36,770   

Vessels, net

    324,284        324,284        336,452        352,674   

Total assets

    381,509        448,282        428,713        440,785   

Total current liabilities

    12,862        3,197        2,967        16,112   

Long-term debt, net of current portion

    115,496        341,034        341,034        356,287   

Owner’s net investment

  $   253,151      $ 104,051      $ 84,712      $ 43,586   
    Historical  
    Nine months
Ended
September 30, 2014
    Nine months
Ended

September 30, 2013
    Year Ended
December 31, 2013
    Year Ended
December 31, 2012
 

Cash Flow Data

       

Net cash provided by /(used in) operating activities

    15,029        (27,731     (39,054     5,247   

Net cash (used in)/provided by investing activities

    (38,906     4,291        (4,531     (31,225

Net cash provided by financing activities

    20,782        22,944        47,961        30,592   

Change in cash and cash equivalents

  $ (3,095   $ (496   $ 4,376      $ 4,614   

Fleet Data

       

Vessels at end of period

    4        4        4        4   

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Unless the context requires otherwise, for purposes of the unaudited combined pro forma financial statements, all references to “we”, “our”, “us” and the “Partnership” refer to Navios Maritime Midstream Partners L.P. and its subsidiaries. References to “Navios Acquisition” refer, depending on the context, to Navios Maritime Acquisition Corporation or any one or more of its subsidiaries. References to “Navios Holdings” refer, depending on the context, to Navios Maritime Holdings Inc. or any one or more of its subsidiaries.

In connection with the initial public offering of the Partnership (the “IPO”), Navios Acquisition will contribute or sell the shares of four vessel-owning subsidiaries (Shinyo Kannika Limited, Shinyo Ocean Limited, Shinyo Kieran Limited and Shinyo Saowalak Limited), in exchange for an aggregate 55.5% limited partner interest in the Partnership, a 2% general partner interest in the Partnership, all of the Partnership’s incentive distribution rights, the net cash proceeds of the IPO and $110.6 million in cash funded by borrowings under the Partnership’s new credit facility. Upon the closing of the IPO, the Partnership will have a fleet of four VLCCs (the “Initial Fleet”) and the Partnership, at its option, will be able to purchase the capital stock of (i) Shinyo Dream Limited, (ii) Sikinos Shipping Corporation, (iii) Kerkyra Shipping Corporation, (iv) Zakynthos Shipping Corporation, (v) Lefkada Shipping Corporation, (vi) Leros Shipping Corporation and (vii) Kimolos Shipping Corporation, the entities that own the following vessels (all VLCCs): C. Dream, Nave Celeste, Nave Galactic, Nave Quasar, Nave Buena Suerte, Nave Neutrino and Nave Electron (in each case, including the related time charters). The combined historical operations of the Initial Fleet are herein referred to as Navios Maritime Midstream Partners Predecessor. As a reorganization of entities under common control, the transfer of the Initial Fleet will be recorded at Navios Acquisition’s historical cost (i.e. carryover basis), with any difference between consideration paid and historical cost accounted for as a transaction with shareholders. The accompanying unaudited pro forma combined financial statements give effect to the following transactions:

Initial Public Offering and Financing

 

  the Partnership’s issuance of 8,100,000 common units (assuming no exercise of the underwriters’ overallotment option) to the public unitholders at an assumed initial public offering price of $20.00 per common unit, resulting in aggregate net proceeds to the Partnership of approximately $148.3 million, after deducting estimated underwriting fees and other offering expenses of $13.7 million;

 

  Navios Acquisition’s refinancing of its 2017 Notes with the proceeds of the issuance of its 2021 Notes in November 2013;

 

  the Partnership’s incurrence of $126.0 million under a new credit facility to be entered into in connection with the IPO;

Reorganization Between Entities Under Common Control

 

  the Partnership’s acquisition of all of the outstanding shares of capital stock of four of Navios Acquisition’s vessel-owning subsidiaries (Shinyo Kannika Limited, Shinyo Ocean Limited, Shinyo Kieran Limited and Shinyo Saowalak Limited) in exchange for aggregate consideration consisting of: (i) 9,342,692 subordinated units of the Partnership, (ii) 1,242,692 common units of the Partnership, (iii) a 2.0% general partner interest in the Partnership, including all of the Partnership’s incentive distribution rights and (iv) $258.9 million of cash consideration; and

 

  the exclusion of certain assets and liabilities either owned or owed by the Navios Maritime Midstream Partners Predecessor or allocated to the Navios Maritime Midstream Partners Predecessor that will not be transferred to or assumed by the Navios Maritime Midstream Partners in connection with the reorganization.

The unaudited pro forma combined balance sheet as at September 30, 2014 assumes the IPO and related transactions occurred on September 30, 2014. The unaudited pro forma combined statements of income for the

 

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year ended December 31, 2013 and for the nine months ended September 30, 2014 assumes the IPO and related transactions occurred on January 1, 2013. Please refer to Note 1 (Basis of Presentation), in the accompanying notes to the unaudited pro forma combined financial statements for further explanation.

The unaudited pro forma combined financial statements and accompanying notes have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) consistent with those used in, and should be read together with, Navios Maritime Midstream Partners Predecessor’s historical combined financial statements and related notes, as well as the information set forth in “Use of Proceeds,” “Selected Audited and Unaudited Pro Forma Combined Financial Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus. The unaudited pro forma balance sheet and statement of income were derived by adjusting the historical combined financial statements of Navios Maritime Midstream Partners Predecessor. The adjustments reflected in the unaudited pro forma combined financial statements are based on currently available information and certain estimates and assumptions; therefore, actual results may differ from the pro forma adjustments. However, management believes that the assumptions used provide a reasonable basis for presenting the significant effects of the initial public offering and the related transactions, and that the pro forma adjustments in the unaudited pro forma combined financial statements give appropriate effect to the assumptions and are applied in conformity with U.S. GAAP.

The unaudited pro forma combined financial statements do not purport to present the Partnership’s results of operations had the IPO and transactions to be effected in connection with the IPO actually been completed at the dates indicated. In addition, they do not project the Partnership’s results of operations for any future period. In addition, the accompanying unaudited pro forma combined statement of income does not reflect any expected cost savings, synergies, restructuring actions, non-recurring items or one-time transaction related costs that we expect to incur or generate in connection with the IPO and related transactions.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

 

     As of September 30, 2014  
     Navios Maritime
Midstream Partners
Predecessor
Historical
     Initial Public
Offering and
Other
Transaction
Adjustments
    Pro Forma  
     (in thousands of U.S. dollars)  

ASSETS

       

Current assets

       

Cash and cash equivalents

   $ 6,057       $ 13,943 (3b)   $ 20,000   
        148,270 (3e)  
        (148,270 )(3f)  

Accounts receivable, net

     883         —   (3g)     883   

Prepaid expenses and other current assets

     91         —   (3g)     91   

Due from related parties

     74,662         (74,662 )(3i)      —    
  

 

 

    

 

 

   

 

 

 

Total current assets

     81,693         (60,719     20,974   
  

 

 

    

 

 

   

 

 

 

Vessels, net

     324,284         —   (3g)     324,284   

Deferred financing costs, net

     7,503         (7,503 )(3c)     —    
        1,449 (3b)     1,449   

Intangible assets

     32,558         —   (3g)     32,558   

Deferred dry dock and special survey costs, net

     2,244         —   (3g)     2,244   
  

 

 

    

 

 

   

 

 

 

Total non-current assets

     366,589         (6,054 )     360,535   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 448,282       $ (66,773   $ 381,509   
  

 

 

    

 

 

   

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

       

Current liabilities

       

Accounts payable

   $ 259       $ —   (3g)   $ 259  

Accrued expenses

     161         —   (3g)     161   

Due to related parties

     839         (839 )(3i)     —    

Current portion of long-term debt

     —          10,504 (3b)      10,504   

Deferred revenue

     1,938         —   (3g)     1,938  
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     3,197         9,665        12,862   
  

 

 

    

 

 

   

 

 

 

Long-term debt, net of current portion

     341,034         (341,034 )(3c)     —    
        115,496 (3b)      115,496   
  

 

 

    

 

 

   

 

 

 

Total non-current liabilities

     341,034         (225,538 )     115,496   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     344,231         (215,873 )     128,358   
  

 

 

    

 

 

   

 

 

 

Commitments and contingencies

     —          —         —    

Owner’s net investment

     104,051         341,034 (3c)  
        (74,662 )(3i)   
        839 (3i)  
        (126,000 )(3b)  
        1,449 (3b)   
        (7,503 )(3c)   
        13,943 (3b)   
        148,270 (3e)   

Common units—held by public

        (148,270 )(3f)      148,270   

Common units—held by general partner and affiliates

          11,884 (3h) 

General partner interest

          3,647 (3h)

Subordinated units

          89,350 (3h)
       

 

 

 

Total partners’ capital

          253,151   
  

 

 

    

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 448,282       $ (66,773   $ 381,509   
  

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

 

     Nine Months Ended September 30, 2014  
     Navios Maritime
Midstream Partners
Predecessor
Historical
    Initial Public Offering
and Other Transaction
Adjustments
    Pro Forma  
     (in thousands of U.S. dollars, except for unit and per unit data)  

Revenue

   $ 47,526      $ —        $ 47,526   

Time charter expenses

     (579 )     —          (579

Direct vessel expenses

     (994 )     —          (994

Management fees

     (10,670 )     296 (3a)      (10,374

General and administrative expenses

     (756 )     (744 )(3d)     (1,500

Depreciation and amortization

     (14,632 )     —          (14,632

Interest expense and finance cost

     (21,343     18,392 (3b)      (2,951

Other income/ (expense), net

     5       —          5  
  

 

 

   

 

 

   

 

 

 

Net (loss)/ income

   $ (1,443 )   $   17,944      $   16,501   
  

 

 

   

 

 

   

 

 

 

General partner’s interest in net income

       $ 330   

Limited partners’ interest:

      

Net income attributable to common units

       $ 8,086   

Net income per:

      

- Common unit (basic and diluted) (note 4)

       $ 0.87   

Weighted average number of units outstanding: (note 4)

      

- Common units (basic and diluted) (note 4)

         9,342,692   

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

 

     Year Ended December 31, 2013  
     Navios Maritime
Midstream Partners
Predecessor
Historical
    Initial Public Offering
and Other Transaction
Adjustments
    Pro Forma  
     (in thousands of U.S. dollars, except for unit and per unit data)  

Revenue

   $    63,659      $ —       $ 63,659   

Time charter expenses

     (900     —         (900

Direct vessel expenses

     (1,919     —         (1,919

Management fees

     (14,600     730 (3a)      (13,870

General and administrative expenses

     (866     (1,134 )(3d)      (2,000

Depreciation and amortization

     (19,508     —         (19,508

Interest expense and finance cost

     (31,249     26,991 (3b)      (4,258

Loss on bond extinguishment

     (23,188       23,188 (3b)      —    

Other expense

     (74     —         (74
  

 

 

   

 

 

   

 

 

 

Net (loss)/ income

   $ (28,645 )    $ 49,775      $ 21,130   
  

 

 

   

 

 

   

 

 

 

General partner’s interest in net income

       $ 423   

Limited partners’ interest:

      

Net income attributable to common units

       $ 10,354   

Net income per:

      

- Common unit (basic and diluted) (note 4)

       $ 1.11   

Weighted average number of units outstanding: (note 4)

      

- Common units (basic and diluted) (note 4)

         9,342,692   

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. Dollars except unit and per unit data)

 

1. Basis of Presentation

The unaudited pro forma combined statement of income for the year ended December 31, 2013 and for the nine months ended September 30, 2014 assume the following transactions occurred on January 1, 2013, and the unaudited pro forma combined balance sheet as at September 30, 2014 assumes that the following transactions occurred on September 30, 2014:

Initial Public Offering and Financing

 

  the Partnership’s issuance of 8,100,000 common units (assuming no exercise of the underwriters’ option) to the unitholders at an assumed initial public offering price of $20.00 per common unit, resulting in aggregate net proceeds to the Partnership of approximately $148.3 million, after deducting estimated underwriting fees and other offering expenses of $13.7 million;

 

  Navios Acquisition’s refinancing of its 2017 Notes with the proceeds of the issuance of its 2021 Notes in November 2013;

 

  the Partnership’s incurrence of $126,000 under a new credit facility to be entered into in connection with the IPO;

Reorganization Between Entities Under Common Control

 

  the Partnership’s acquisition of all of the outstanding shares of capital stock of four of Navios Acquisition’s vessel-owning subsidiaries (Shinyo Kannika Limited, Shinyo Ocean Limited, Shinyo Kieran Limited and Shinyo Saowalak Limited) in exchange for aggregate consideration consisting of: (i) 9,342,692 subordinated units of the Partnership, (ii) 1,242,692 common units of the Partnership, (iii) a 2.0% general partner interest in the Partnership, including all of the Partnership’s incentive distribution rights and (iv) $258.9 million of cash consideration; and

 

  the exclusion of certain assets and liabilities either owned or owed by the Navios Maritime Midstream Partners Predecessor or allocated to the Navios Maritime Midstream Partners Predecessor that will not be transferred to or assumed by the Navios Maritime Midstream Partners in connection with the reorganization.

The effect on the unaudited pro forma combined financial statements of certain of the previously mentioned transactions is more fully described in Note 3.

The unaudited pro forma combined financial statements are not necessarily indicative of what the Partnership’s results of operations and financial position would have been, nor do they purport to project the Partnership’s results of operations for any future periods. The unaudited pro forma combined financial statements should be read in conjunction with the combined financial statements of Navios Maritime Midstream Partners Predecessor referred to above.

 

2. Summary of Significant Accounting Policies

The accounting policies followed in preparing the unaudited pro forma combined financial statements are consistent with those used by Navios Maritime Midstream Partners Predecessor as set forth in its historical combined financial statements contained elsewhere in this prospectus.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS—(Continued)

(Expressed in thousands of U.S. Dollars except unit and per unit data)

 

3. Initial Public Offering and Related Transactions of Navios Maritime Midstream Partners Predecessor—Pro Forma Adjustments and Assumptions

The unaudited pro forma combined financial statements give pro forma effect to the following:

 

  (a) The Partnership’s entry into a new management agreement with Navios Holdings pursuant to which Navios Holdings will provide certain commercial and technical management services to the Partnership for a daily fee of $9.5 per owned VLCC, which will be fixed for the first two years of that agreement. Had the management agreement been effective on January 1, 2013, the management fees of the owned vessels would have decreased by $730 for the year ended December 31, 2013 and by $296 for the nine month period ended September 30, 2014. The decrease is due to the higher fixed daily fee that was charged to Navios Acquisition for the year ended December 31, 2013, of $10.0 per day per owned VLCC compared to the new fixed daily fee of $9.5 per owned VLCC.

 

  (b) In November 2013, Navios Acquisition completed sale of a total of $610,000 of 8.125% Senior Notes due 2021 (the “2021 Notes”). The existing 2017 Notes were fully extinguished. The historical financial statements reflect a pro rata allocation (“push down”) of the 2017 Notes and, subsequently, the 2021 Notes (as well as the related deferred financing costs, interest expense, amortization of deferred financing costs and loss on extinguishment) because the Navios Maritime Midstream Partners L.P.’s Initial Fleet was pledged as collateral for the 2021 Notes.

In connection with the IPO, 100% of the liability associated with the 2021 Notes will remain with Navios Acquisition. Navios Maritime Midstream Partners L.P. will enter into a new credit facility for $126,000 at an assumed average interest rate of 3.28% (LIBOR plus 300 basis points, which is based on using historical 3 month LIBOR for each calendar quarter), and which has a minimum liquidity (as defined in the credit facility) at all times greater than the next six months’ period debt service obligations. The effect of a  18 percent variance was minimal. In connection with the issuance of this debt, the Partnership estimates that it will incur and capitalize $1,449 in deferred financing costs, which will be amortized using the effective interest method over the expected maturity of the new credit facility, which is assumed to be five years.

Accordingly, this adjustment reflects:

 

    the elimination of all historical interest expense and finance cost (including amortization of the related deferred financing costs) associated with the 2017 Notes and 2021 Notes;

 

    interest expense amounting to $4,258 (including amortization of deferred financing costs amounting to $290) for the year ended December 31, 2013 and $2,951 (including amortization of deferred financing costs amounting to $145) for the nine months ended September 30, 2014; and

 

    the elimination of $23,188 associated with the extinguishment of the 2017 Notes because the loss on extinguishment is directly related to the refinancing, non-recurring in nature and was reflected in the historical statement of operations of Navios Maritime Midstream Partners Predecessor upon extinguishment.

 

    The draw down of $126,000 of the $126,000 facility on the date of this offering. The facility is repayable in 20 quarterly installments of $2,626, with a final balloon repayment of $73,481 to be repaid on the last repayment date. The current and long-term portion of long-term debt has been allocated based on the contract terms of the facility.

 

    a minimum cash balance of $20,000 to be retained by the Partnership.

 

  (c)

Elimination of the outstanding debt balance of $341,034 as at September 30, 2014, together with the respective unamortized balance of the capitalized debt fees of $7,503, which were allocated to the

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS—(Continued)

(Expressed in thousands of U.S. Dollars except unit and per unit data)

 

  vessel-owning subsidiaries and reflected on a “push down” basis in the historical financial statements of Navios Maritime Midstream Partners Predecessor, as Navios Maritime Midstream Partners L.P. will not assume any portion of the 2021 Notes following the IPO and related transactions.

 

  (d) Reflects the Partnership’s incurrence of estimated general and administrative expenses of $1,500 for the nine months ended September 30, 2014 and $2,000 for the year ended December 31, 2013, which Navios Maritime Midstream Partners L.P. believes is a reasonable estimate of the costs of operating as a stand-alone entity. Such expenses include: bookkeeping, audit and accounting services, insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. The historical financial statements of Navios Maritime Midstream Partners Predecessor reflect an allocation of approximately $525 of general and administrative expenses from Navios Acquisition for the year ended December 31, 2013 ($600 for the nine months ended September 30, 2014). Accordingly, this adjustment reflects incremental general and administrative costs of $1,134 for the year ended December 31, 2013 and $744 for the nine months ended December 31, 2014.

 

  (e) The Partnership’s receipt of net proceeds of $148.3 million from the issuance and sale of common units (assuming no exercise of the underwriters’ overallotment option), at an assumed initial public offering price of $20.00 per common unit, net of estimated underwriting fees and other offering expenses amounting to $13.7 million.

 

  (f) The Partnership’s acquisition of all of the outstanding shares of capital stock of four of Navios Acquisitions’ vessel-owning subsidiaries (Shinyo Kannika Limited, Shinyo Ocean Limited, Shinyo Kieran Limited and Shinyo Saowalak Limited) in exchange for:

 

    9,342,692 subordinated units of the Partnership and 1,242,692 common units of the Partnership;

 

    the issuance to Navios Maritime Midstream Partners GP LLC, a wholly owned subsidiary of Navios Acquisition, of the 2.0% general partner interest in the Partnership and all of the Partnership’s incentive distribution rights; and

 

    the net proceeds of the IPO and (approximately $148.3 million assuming an initial public offering price of $20.00 per common unit), and an additional $110.6 million funded by borrowings under the Partnership’s new credit facility.

 

  (g) The acquisition of the vessels and their respective intangible assets has been accounted for as a purchase under common control. The vessels will be accounted for by the Partnership at their historical carrying values. The difference between the amount paid by the Partnership for the vessels acquired and their carrying values along with the assets contributed or sold to the Partnership, or assumption of liabilities will be recorded as a contribution from Navios Acquisition as of the date of the transactions.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS—(Continued)

(Expressed in thousands of U.S. Dollars except unit and per unit data)

 

The pro-forma purchase price allocation, presented in the following table, reflects the contribution to Navios Acquisition as of the date of the transactions:

 

     Original
Aggregate
Pro Forma
Adjustments
 
     (in thousands of U.S.
dollars)
 

Aggregate cash consideration to be paid to Navios Acquisition in exchange for acquisition of vessels:

  

Gross proceeds on issuance of common units

   $ 162,000   

Estimated underwriting fees and offering-related expenses

     13,730   
  

 

 

 

Net proceeds on issuance of common units

     148,270   

Incurrence of debt, net of financing costs and cash retained

     110,608   
  

 

 

 

Aggregate cash consideration to be paid to Navios Acquisition in exchange for acquisition of vessels

   $ 258,878   
  

 

 

 

Less: carrying amounts of assets and liabilities assumed from Navios Acquisition:

  

Owners’ net investment as of September 30, 2014

   $ 104,051   

Long -term debt net of unamortized deferred financing costs retained by Navios Acquisition

     333,531   

Net amount due from related parties to be forgiven

     (73,823
  

 

 

 

Net assets assumed (at carrying amounts)

   $ 363,759   
  

 

 

 

Navios Acquisition contribution (shortfall of cash consideration paid over carrying value of net assets assumed)

   $ 104,881   
  

 

 

 

 

  (h) The partners’ net investment is allocated between the general partner and the limited partners through the allocation of the net proceeds of the offering to the common units held by the public and through the allocation of the per unit basis to the general partner interest and the subordinated units. The per unit basis is calculated by allocating partners’ net investment to the general partner interest, the subordinated units and the common units to be held by Navios Acquisition and subtracting from this the common unitholders’ net investment attributable to the net proceeds from the Offering that is in excess of the pre-offering proportional common unit balance.

The partners’ net investment is allocated as follows:

 

     (in thousands of U.S. dollars)  

Net assets assumed

   $ 363,759   

Incurrence of new debt, net of financing costs and cash retained

     (110,608
  

 

 

 

Total partners’ capital

     253,151   

Less: common units held by public

     (148,270
  

 

 

 

Parent net investment

   $ 104,881   
  

 

 

 

Common units

   $ 11,884   

General partner interest

   $ 3,647   

Subordinated units

   $ 89,350   

Pursuant to the Partnership’s agreement of limited partnership, to the extent that the quarterly distributions exceed certain targets, the general partner is entitled to receive certain incentive distributions that will result in

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS—(Continued)

(Expressed in thousands of U.S. Dollars except unit and per unit data)

 

more net income proportionally being allocated to the general partner than to the holders of common and subordinated units. During any of the quarters in the periods presented, quarterly distributions did not meet the targets for incentive distributions. Accordingly, the pro forma net income calculations reflect the fact that no incentive distributions were made to the general partner.

The rights of holders of the Partnership’s subordinated units differ from those of the holders of the Partnership’s common units. During the subordination period, which is defined below, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.4125 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units.

The subordination period will extend until the first day of any quarter, beginning after September 30, 2017, provided that each of the following tests are met:

 

    distributions by the Partnership of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

    the adjusted operating surplus generated by the Partnership during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2.0% general partner interest during those periods; and

 

    there are no outstanding arrearages in payment of the minimum quarterly distribution on the common units.

If the unitholders remove the Partnership’s general partner without cause, the subordination period will end.

Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the unitholders remove the Partnership’s general partner other than for cause and units held by the Partnership’s general partner and its affiliates are not voted in favor of such removal:

 

    the subordination period will end and each subordinated unit will immediately convert into one common unit;

 

    any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and

 

    the Partnership’s general partner will have the right to convert its general partner interest and, if any, its incentive distribution rights into common units or to receive cash in exchange for those interests.

 

(i) Prior to the consummation of this proposed offering, Navios Acquisition and Navios Holdings will forgive all of its outstanding related party receivables and payables which will be reflected as a capital contribution from Navios Acquisition and Navios Holdings when forgiven.

 

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NAVIOS MARITIME MIDSTREAM PARTNERS L.P.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS—(Continued)

(Expressed in thousands of U.S. Dollars except unit and per unit data)

 

4. Net Income Per Unit

 

     Common Unitholders  
     For the nine month period
ended September 30, 2014
     For the year
ended December 31, 2013
 
     (in thousands, except number of units and per unit data)  

Pro forma net income

   $ 8,086       $ 10,354   

Pro forma weighted average number of units outstanding

     9,342,692         9,342,692   
  

 

 

    

 

 

 

Pro forma net income per unit

   $ 0.87       $ 1.11   
  

 

 

    

 

 

 

Pro forma net income per unit is determined by dividing the pro forma net income that would have been allocated, in accordance with the Partnership’s agreement of limited partnership, to the common unitholders by the number of common units expected to be outstanding at the close of the Offering. For purposes of this calculation, the Partnership has assumed that: (1) pro forma distributions were equal to pro forma earnings, (2) the number of units outstanding was 9,342,692 common units and (3) all units have been outstanding since the beginning of the periods presented. During the nine months ended September 30, 2014 and the year ended December 31, 2013, the cash available for distribution would be sufficient to pay three and four quarterly distributions of $0.4125 per unit respectively to the common unitholders. Pursuant to the Partnership’s agreement of limited partnership, to the extent that the quarterly distributions exceed certain targets, the general partner is entitled to receive certain incentive distributions that will result in more net income proportionally being allocated to the general partner than to the holders of common and subordinated units. During any of the quarters in the periods presented, quarterly distribution did not meet the target for certain incentive distributions. Accordingly, the pro forma net income calculations reflect the fact that no incentive distributions were made to the general partner.

The pro forma weighted-average number of units outstanding is based upon the pro forma issuance of common units by the Partnership on January 1, 2013. Please read Note 1.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the combined predecessor financial statements and related notes of Navios Maritime Midstream Partners Predecessor included elsewhere in this prospectus. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. The financial statements have been prepared in accordance with U.S. GAAP and are presented in U.S. Dollars. Any amounts converted from Euros or another non-U.S. currency to U.S. Dollars in this prospectus are at the rate applicable at the balance sheet date.

Prior to the closing of this offering, our partnership will not own any vessels. The following discussion assumes that our business was operated as a separate entity prior to its inception.

The combined carve-out financial statements, the results of which are discussed below, have been carved out of the consolidated financial statements of Navios Maritime Acquisition, which operated the vessels in our fleet during the years presented. Navios Maritime Acquisition vessels and other assets, liabilities, revenues, expenses and cash flows that do not relate to the vessels or time charter contracts to be acquired by us are not included in our combined carve-out financial statements. Our financial position, results of operations and cash flows reflected in our combined carve-out financial statements include all expenses allocable to our business, but may not be indicative of those that would have been incurred had we operated as a separate public entity for all years presented or of future results. Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties. Please read “Forward-Looking Statements” for more information. You should also review the “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements. You should also carefully read the following discussion with “Risk Factors,” “The International Oil Tanker Shipping Industry, “Forward-Looking Statements,” and “Selected Audited and Unaudited Pro Forma Combined Financial and Operating Data.” We manage our business and analyze and report our results of operations in a single segment.

Business Overview

Introduction

Navios Maritime Midstream Partners L.P. owns a fleet of four VLCCs providing world-wide marine transportation services. Our strategy is to charter our vessels to international oil companies, refiners and large vessel operators under long-term charters. We are committed to providing quality transportation services and developing and maintaining long-term relationships with our customers. We believe that the Navios brand will allow us to take advantage of increasing global environmental concerns that have created a demand in the petroleum products/crude oil seaborne transportation industry for vessels and operators that are able to conform to the stringent environmental standards currently being imposed throughout the world.

 

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Navios Maritime Midstream Partners L.P.’s Fleet

Following the closing of this offering, our fleet will consist of a total of four VLCC tankers (over 280,000 dwt per ship), which transport crude oil, aggregating approximately 1.2 million deadweight tons, or dwt. The vessels are currently chartered-out to two strong counterparties, Cosco Dalian, which is wholly owned by the COSCO Group, a Chinese state-owned enterprise, and Formosa Petrochemical, a Taiwan Stock Exchange-listed company with a market capitalization of approximately $23 billion, with an average remaining employment term of approximately 7.7 years. As of October 27, 2014, we had charters covering 100.0% of available days in 2014, 100.0% of available days in 2015 and 100.0% of available days in 2016.

 

Vessels

   Type      Built/
Delivery

Date
     DWT      Net
Charter
Rate(1)
     Profit Share to Owner    Expiration
Date(2)
   Remaining
Payment
Period

Shinyo Ocean

     VLCC         2001         281,395         38,400       50% above $43,500(4)    January 2017    4.2 years(3)

Shinyo Kannika

     VLCC         2001         287,175         38,025       50% above $44,000(5)    February 2017    4.3 years(3)

Shinyo Saowalak

     VLCC         2010         298,000         48,153       35% above $54,388(6)

40% above $59,388(6)

50% above $69,388(6)

   June 2025    10.6 years

Shinyo Kieran

     VLCC         2011         297,066         48,153       35% above $54,388(6)

40% above $59,388(6)

50% above $69,388(6)

   June 2026    11.6 years

 

(1) Net time charter-out rate per day in dollars (net of commissions).
(2) Estimated dates assuming midpoint of redelivery of charterers.
(3) Reflects an initial charter length of 2.2 years and a backstop period of 2.0 years for Shinyo Ocean. Reflects an initial charter length of 2.3 years and a backstop period of 2.0 years for Shinyo Kannika. During the respective backstop period following the scheduled redelivery of each vessel, Navios Maritime Acquisition will provide a backstop commitment at the currently contracted rate if the market charter rate during the backstop period is lower than the agreed upon floor rate. Conversely, if market charter rates are higher during the backstop period, such vessels will be chartered out to third-party charterers at prevailing market rates and Navios Maritime Acquisition’s backstop commitment will not be triggered. The backstop commitment does not include the profit share as set forth in the table. All data in the table is based on a charter length inclusive of both the initial and backstop periods.
(4) Calculated semi-annually on the basis of the daily values of the Baltic Exchange Tanker Route AG/Japan for the past two quarters adjusted for the vessel’s specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(5) Calculated semi-annually on the basis of the weighted average of the daily values of four Baltic Exchange Tanker Routes for the past two quarters adjusted for certain agreed specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.
(6) Calculated annually on the basis of the weighted average of the daily values of four Baltic Exchange Tanker Routes for the past four quarters adjusted for certain agreed specifications (i.e. actual consumption and other voyage expenses). Any profit is split between the owner and the charterer with the owner receiving the percentage stated in the table above.

Our historical results of operations and cash flows are not indicative of the results of operations or cash flows to be expected from any future period. Because these vessels were operated as part of Navios Maritime Acquisition during the historical periods presented, the vessels were operated in a different manner than they will be in the future.

For more detail on the differences between our historical results and expected future results, please read “—Trends and Factors Affecting our Future Results of Operations” below. For more detail on our expected future operations, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

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Our Customers

We provide or will provide seaborne shipping services under charters with customers that we believe are creditworthy.

Our sole customers during the nine month periods ended September 30, 2014 and 2013 and for the years ended December 31, 2013 and 2012, were Cosco Dalian and Formosa Petrochemical. For the nine month period ended September 30, 2014, these two customers accounted for 77.9% and 22.1%, respectively, of our revenue. For the nine month period ended September 30, 2013, these two customers accounted for 77.9% and 22.1%, respectively, of our revenue. For the year ended December 31, 2013, these two customers accounted for 77.9% and 22.1%, respectively, of our revenue. For the year ended December 31, 2012, these two customers accounted for 78.0% and 22.0%, respectively, of our revenue.

Although we believe that if any one of our charters were terminated we could re-charter the related vessel at the prevailing market rate relatively quickly, the permanent loss of a significant customer or a substantial decline in the amount of services requested by a significant customer could harm our business, financial condition and results of operations if we were unable to re-charter our vessel on a favorable basis due to the current market conditions, or otherwise.

We believe that the combination of the long-term nature of our charters (which provide for the receipt of a fixed fee for the life of the charter) and our management agreement with the Manager (which will provide for a fixed management fee for an initial term of approximately two years from the closing of this offering) will provide us with a strong base of stable cash flows.

Our revenues are driven by the number of vessels in the fleet, the number of days during which the vessels operate and our charter hire rates, which, in turn, are affected by a number of factors, including:

 

    the duration of the charters;

 

    the level of spot and long-term market rates at the time of charter;

 

    decisions relating to vessel acquisitions and disposals;

 

    the amount of time spent positioning vessels;

 

    the amount of time that vessels spend undergoing repairs and upgrades in drydock;

 

    the age, condition and specifications of the vessels; and

 

    the aggregate level of supply and demand in the tanker shipping industry.

Time charters are available for varying periods, ranging from a single trip (spot charter) to long-term which may be many years. In general, a long-term time charter assures the vessel owner of a consistent stream of revenue. Operating the vessel in the spot market affords the owner greater spot market opportunity, which may result in high rates when vessels are in high demand or low rates when vessel availability exceeds demand. We intend to operate our vessels in the long-term charter market. Vessel charter rates are affected by world economics, international events, weather conditions, strikes, governmental policies, supply and demand and many other factors that might be beyond our control.

If we lose a charter, we may be unable to re-deploy the related vessel on terms as favorable to us due to the long-term nature of most charters and the cyclical nature of the industry or we may be forced to charter the vessel on the spot market at then market rates which may be less favorable than the charter that has been terminated. However, we believe that if any one of our current charters were terminated, we could recharter the vessel in an expeditious manner at a favorable rate, based on current conditions in the tanker market. The loss of any of our customers, time charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions in the event we are unable to replace such customer, time charter or vessel.

 

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Under some of our time charters, either party may terminate the charter contract in the event of war in specified countries or in locations that would significantly disrupt the free trade of the vessel. Some of the time charters covering our vessels require us to return to the charterer, upon the loss of the vessel, all advances paid by the charterer but not earned by us.

Expenses

Management fees: Pursuant to a management agreement dated May 28, 2010 (the “Existing Management Agreement”), the Manager provides, for five years from the inception of the agreement, commercial and technical management services to Navios Maritime Acquisition’s vessels for a daily fee of $10,000 per owned VLCC vessel for the first two years. On May 4, 2012, Navios Maritime Acquisition amended the Existing Management Agreement with the Manager, to fix the fees for ship management services of its owned fleet at the same rate for two additional years, through May 28, 2014. In May 2014, Navios Acquisition extended the duration of the Existing Management Agreement with Navios Holdings, until May 2020 and reduced the rate by 5% from $10,000 to $9,500 daily rate per VLCC vessel.

At the closing of this offering, we will enter into a five-year management agreement with Navios Maritime Holdings (the “New Management Agreement”) on similar terms to the Existing Management Agreement, pursuant to which Navios Maritime Holdings will provide commercial and technical management services to our vessels for a daily fee of $9,500 per VLCC tanker vessel for a term of two years. Under the New Management Agreement, we will be required to pay additional fees to Navios Maritime Holdings for additional costs incurred by it in some circumstances.

General and administrative expenses: At the closing of this offering, we will enter into an administrative services agreement (the “New Administrative Services Agreement”) with Navios Maritime Holdings, pursuant to which Navios Maritime Holdings will provide certain administrative management services to us. We expect the terms of this agreement to be in line with the existing general and administrative services agreement, between Navios Maritime Holdings and Navios Maritime Acquisition, dated May 28, 2010 (the “Existing Administrative Services Agreement”) pursuant to which Navios Maritime Holdings provides certain administrative management services to Navios Maritime Acquisition which include: bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. The New Administrative Services Agreement will have an initial term of five years from the closing date of this offering. We will reimburse Navios Maritime Holdings for reasonable costs and expenses incurred in connection with the provision of these services.

Trends and Factors Affecting Our Future Results of Operations

We believe the principal factors that will affect our future results of operations are the economic, regulatory, political and governmental conditions that affect the shipping industry generally and that affect conditions in countries and markets in which our vessels engage in business. Other key factors that will be fundamental to our business, future financial condition and results of operations include:

 

    the demand for seaborne transportation services;

 

    the ability of Navios Maritime Acquisition’s commercial and chartering operations to successfully employ our vessels at economically attractive rates, particularly as our fleet expands and our charters expire;

 

    the effective and efficient technical management of our vessels;

 

    Navios Maritime Holdings’ ability to satisfy technical, health, safety and compliance standards of major oil companies and oil producers; and

 

    the strength of and growth in the number of our customer relationships, especially with major oil companies and oil producers.

 

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In addition to the factors discussed above, we believe certain specific factors will impact our combined results of operations. These factors include:

 

    the charter hire earned by our vessels under our charters;

 

    the length of time of the charters we are able to enter into;

 

    our access to capital required to acquire additional vessels and/or to implement our business strategy;

 

    our ability to sell vessels at prices we deem satisfactory;

 

    our level of debt and the related interest expense and amortization of principal; and

 

    the level of any distribution on our common and subordinated units.

Period over Period Comparisons

For the Nine Month Period Ended September 30, 2014 Compared to the Nine Month Period Ended September 30, 2013

The following table presents revenue and expense information for the nine months ended Septembe