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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
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.
..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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Moody's downgrades Horizon Lines CFR to Caa1; outlook negative
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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