Here's Why Capital Products Partners L.P. Is Sinking Today

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What: Units of Capital Products Partners were down more than 24% by 11:00 a.m. EDT on Tuesday. Weighing on the shipping MLP is its decision to reduce its distribution because of a weak outlook in the shipping industry.

So what: Capital Products Partners announced it will reduce its quarterly distribution from $0.2385 per unit to $0.075 per unit, which is a 68.6% reduction. That reduction is partially the result of a drop in cash available for distribution thanks to the currently weak market conditions as well as its decision to create a capital reserve in order to better position itself for the downturn. Further, it plans to maintain its new payout rate through 2018 unless industry conditions significantly improve.

One of the issues facing the company is the impact the downturn in the container and dry cargo shipping market is having on its largest customer, which has engaged in a restructuring process. That restructuring could result in a substantial drop in revenue for Capital Products Partners.

In addition to that, the company has seen its capital costs skyrocket because of the aforementioned market weakness as well as a significant dislocation in the capital markets for MLPs. That sector-specific weakness has forced a number of MLPs to reduce their distribution in order to internally fund their capital needs.

Midstream MLP NGL Energy Partners (NYSE: NGL), for example, recently had to seek out the assistance of an alternative investment management companyto complete a private placement of high-yield convertible preferred units in order to bolster its balance sheet after the capital markets were no longer an option. Further, NGL Energy Partners also needed to reduce its distribution by 39% in order to free up cash flow that it could use for debt reduction and to fund growth initiatives.

Like NGL Energy Partners, Capital Products Partners is planning to use its freed up cash flow from the distribution reduction to pay down debt, with the company expecting to repay $175.7 million in debt by the end of 2018. That will enable it to maintain a strong balance sheet during the downturn, especially if the restructuring of its top customer forces it to redeploy chartered vessels in the currently weak market conditions.

Now what: With conditions in the shipping industry deteriorating, Capital Products Partners is being proactive in order to make sure it can stay afloat amid the storm. It estimates that by cutting its distribution, the company is now in a much better position to withstand a worst-case scenario by its top customer without sinking. That being said, there could still be more dominoes to fall, which is why investors are jumping ship today.

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