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Rating Action:

Moody's downgrades Horizon Lines CFR to Caa1; outlook negative

Global Credit Research - 18 May 2010

$680 million of rated credit facilities and notes affected

New York, May 18, 2010 -- Moody's Investors Service downgraded its debt ratings of Horizon Lines, Inc. ("Horizon"); corporate family and probability of default, each to Caa1 from B3; senior secured to B1 from Ba3 and senior unsecured to Caa3 from Caa2. The outlook is negative.

The downgrades reflect Moody's belief that Horizon's liquidity has weakened because of continuing slack demand for its liner service across its three U.S. Jones Act trade lanes. Moody's anticipates that demand in upcoming periods will remain constrained and lead to a level of free cash flow generation that is not sufficient to cover scheduled principal amortization of the term loan. Larger capital spending plans and more drydockings in 2010 versus 2009 also pressure free cash flow generation. The prospect of one or more significant payments to resolve the Department of Justice investigation and / or class action lawsuits further weigh on Horizon's liquidity profile. Consequently a refinancing of the company's capital structure will likely be necessary to meet the various cash demands.

The negative outlook reflects concern that absent a significant improvement in operating results, Horizon will be reliant on a refinancing of its debt to address the upcoming principal amortization. This could cause the issuer to increasingly rely on its revolver as the maturity of the company's debt capital in 2012 nears. Modest cushion with the financial covenants of the credit facility also constrain availability to less than the face amount based on current utilization. This could limit Horizon's flexibility to reach settlements of the DOJ investigation and its litigation exposures. The negative outlook also considers Moody's view that successfully refinancing the current debt structure could be challenging because of the company's modest free cash flow profile and weak coverage of the interest burden of the existing debt structure that benefits from the relatively low coupon on the $330 million, 4.25% convertible notes due August 2012.

Horizon maintains leading positions in its core Jones Act markets and provides a key link in its customers' distribution chains and the geographic regions it serves. However, this foundation is not sufficient to offset the liquidity pressures and maintain a single-B credit profile. Notwithstanding that these factors should support a core level of underlying volume for the company's services; Horizon has had difficulty offsetting volume pressure with pricing initiatives, leading to weakening operating and free cash flow generation.

Ratings could be further downgraded if the company does not timely execute a refinancing to bolster its capital structure. The inability to strengthen FFO + Interest to Interest to above 3.5 times and Free Cash Flow to above 5% of Debt will be primary indicators of refinancing difficulty as would Debt to EBITDA that remains above 6.5 times. Additional liquidity pressure, including from any cash outflows related to the resolution of the DOJ investigation and / or class-action litigation, could also lead to a downgrade of the ratings. The outlook could be stabilized if Horizon becomes able to generate significant free cash flow which it applies to debt reduction. The outlook could also be stabilized if the DOJ investigation and lawsuits are settled at amounts that do not consume the majority of Horizon's available liquidity. Additionally, the outlook could be stabilized if Horizon sustains Funds from Operations + Interest to Interest above 3.5 times or Debt to EBITDA below 6.5 times after a favorable resolution of the DOJ investigation and litigation matters.

The principal methodology used in rating Horizon was Global Shipping, published in December 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating Horizon can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action was on August 6, 2009 when Moody's lowered the corporate family and probability of default ratings one notch to B3, the senior secured rating to Ba3 from Ba2 and the senior unsecured rating to Caa2 from Caa1.

Downgrades:

..Issuer: Horizon Lines, Inc.

....Probability of Default Rating, Downgraded to Caa1 from B3

....Corporate Family Rating, Downgraded to Caa1 from B3

....Senior Secured Bank Credit Facility, Downgraded to B1 from Ba3

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Caa3 from Caa2

Horizon Lines, Inc. ("Horizon") based in Charlotte, North Carolina, through its wholly-owned indirect operating subsidiary, Horizon Lines, LLC, operates 15 Jones Act qualified U.S. flag container ships in Jones Act liner services between the continental United States and either Alaska, Hawaii, or Puerto Rico and five U.S. flag container ships operating between the U.S. West coast and Guam, in which vessels are slot-chartered from the Far East to the U.S. West Coast.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jonathan Root
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Horizon Lines CFR to Caa1; outlook negative
No Related Data.
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