2023-07-02 06:58:16 ET
Summary
- Following last year's acquisition by parent Höegh LNG Holdings, Höegh LNG Partners decided to delist its 8.75% Series A Cumulative Redeemable Preferred Units from the NYSE.
- The move forced some large institutional investors to dispose of their holdings and effectively precluded retail investors from trading the units.
- While Höegh LNG Partners reported solid first quarter results in May, the partnership is still dealing with substantial arbitration claims filed by the Indonesian charterer of the PGN FSRU Lampung.
- Claims raised in the arbitration proceedings hold some risk for the partnership's ability to continue making distributions to preferred unitholders going forward.
- Given the lack of tangible alternatives at this point, I am assigning a "Hold" rating to the company's Series A Preferred Units.
Note:
I have covered Höegh LNG Partners LP ( HMLPF ) previously, so investors should view this as an update to my earlier articles on the company.
Thirteen months ago, Höegh LNG Partners LP ("Höegh LNG Partners") entered into a definitive merger agreement with parent Höegh LNG Holdings Ltd. ("Höegh LNG").
Under the merger agreement, Höegh LNG would acquire all of the outstanding publicly held common units of the partnership at a price of $9.25 per common unit in cash for a total purchase price of $167.6 million.
On September 23, 2022 parent Höegh LNG completed the acquisition.
In connection with the transaction, the partnership's incentive distribution rights were cancelled while its Series A 8.75% Cumulative Redeemable Preferred Units ("Series A Preferred Units") remained outstanding.
Investors should note that Höegh LNG Partners has the right to redeem the Series A Preferred Units at any time at a redemption price equal to $25.00 per unit plus accumulated and unpaid distributions to the date of redemption.
But considering the current interest rate environment, a near-term redemption appears highly unlikely.
On December 5, the partnership announced the upcoming delisting of its Series A Preferred Units (emphasis added by author):
Höegh LNG Partners LP (...) announces that its board of directors has approved the delisting of the Partnership's 8.75% Series A Cumulative Redeemable Preferred Units. The Partnership also plans to give notice to the New York Stock Exchange of its intent to voluntarily delist the Preferred Units and to withdraw the registration of its Preferred Units with the Securities and Exchange Commission.
The Partnership intends to file a Form 25 Notification of Removal from Listing with the SEC on or about December 23, 2022, and the delisting will be effective on or about January 2, 2023, ten days after the filing of the Form 25.
In connection with the foregoing, the Partnership also intends to file a Form 15 with the SEC to suspend the Partnership's reporting obligations under the Securities Exchange Act of 1934 , as amended, in connection with the Preferred Units.
The Partnership has not arranged for listing and/or registration on another national securities exchange or for quotation of the Preferred Units in a quotation medium .
However, the rights of the holders of the Preferred Units will not be affected under the Partnership's limited partnership agreement.
After the delisting and deregistration of the Preferred Units, the Partnership expects to continue to make annual and quarterly financial statements available to the public on its website.
The Board's decision to delist and deregister the Preferred Units was based on a review of several factors, including the costs associated with maintaining the Partnership's listing and preparing and filing periodic reports with the SEC, the reduction of significant legal, audit and other costs associated with being a reporting company, the likely inability of the Partnership to raise capital through issuance of additional Preferred Units and eliminating the demands on management's time of complying with the NYSE listing standards and SEC reporting rules.
Not surprisingly, the delisting announcement caused a major sell-off in the Series A Preferred Units which ended the week down by more than 35% on heavy trading volume:
The delisting not only resulted in the requirement for institutional owners like the iShares Preferred and Income Securities ETF ( PFF ) to dispose of their holdings but also precluded retail investors from trading the units as access to the OTC Expert Market is usually limited to broker-dealers and professional or sophisticated investors.
Consequently, retail holders of the company's Series A Preferred Units appear trapped at this point as they can't sell or add to existing positions.
While I do not expect the partnership to reduce or even eliminate distributions to preferred unitholders anytime soon, there's basically no chance for individual investors to take advantage of the Series A Preferred Units juicy 15%+ distribution yield at prevailing trading prices.
The issue is also very much visible in the units' paltry trading volume:
Between June 14 and June 30, only 17,800 units changed hands with three sessions not showing a single trade.
In late May, Höegh LNG Partners reported financial results for Q1/2023 which showed further increases in the company's unrestricted cash position:
Unfortunately, the company is still dealing with substantial arbitration claims filed by the Indonesian charterer of the FSRU PGN FSRU Lampung (emphasis added by author):
As previously reported, by letter dated July 13, 2021, the charterer under the lease and maintenance agreement for the PGN FSRU Lampung (“LOM”) raised certain issues with PT Hoegh LNG Lampung in relation to the operations of the PGN FSRU Lampung and the LOM and by further letter dated July 27, 2021, stated that it would commence arbitration against PT Hoegh LNG Lampung.
On August 2, 2021, the charter served a notice of arbitration (“NOA”) to declare the LOM null and void, and/or to terminate the LOM, and/or seek damages . On June 13, 2022, the charterer filed a statement of claim with a request for a primary relief and three alternative reliefs.
The charterer’s claim of restitution if the LOM is declared null and void is $416 million, increasing to $472 million by June 2023 plus interest and costs.
PT Hoegh LNG Lampung has previously served a reply refuting the claims as baseless and without legal merit and has also served a counterclaim against the charterer for multiple breaches of the LOM and a claim against the parent company of the charterer for the fulfilment of the charterer’s obligations under the LOM as stated in a guarantee provided by the parent company, with a claim for damages.
On June 13, 2022, PT Hoegh LNG Lampung filed its statement of claim, and a statement of defence was filed in September 2022. PT Hoegh LNG Lampung will take all necessary steps and will vigorously contest the charterer’s claims in the legal process.
While it make take years until a final determination in this case has been made, the ongoing arbitration proceedings clearly hold some risk for the partnership's ability to continue making distributions to preferred unitholders going forward.
Bottom Line
Höegh LNG Partners' decision to delist its Series A Preferred Units from the NYSE has harmed unitholders and effectively precluded retail investors from trading the units.
But even investors with access to the OTC Expert Market aren't likely to chase the units' 15%+ yield at this point given the lack of liquidity and the risks arising from the above discussed arbitration.
Given the lack of alternatives at this point, I am assigning a "Hold" rating to the Series A Preferred Units.
For further details see:
Hoegh LNG Partners Series A Preferred Shares Hit Hard By Delisting Decision