May 27, 2004
Standard & Poors puts Horizon Lines on CreditWatch
Standard & Poor's Ratings Services yesterday said it had placed its ratings, including its 'BB-' corporate credit rating, on Horizon Lines LLC on CreditWatch with negative implications.
The move followed the recent announcement that the Carlyle Group has entered into an agreement to sell its interest in Horizon Lines to Castle Harlan Inc., another private equity firm.
"Castle Harlan's purchase price for Horizon Lines is $650 million, compared with the $315 million paid by The Carlyle Group in 2003," said Standard & Poor's credit analyst Kenneth L. Farer. "If the acquisition is financed with a substantial amount of debt, Horizon Lines' credit profile may weaken to a level no longer consistent with the current rating."
Standard & Poor's will meet with management and representatives from Castle Harlan to discuss the acquisition and financing plans, and the resultant credit profile, to resolve the CreditWatch.
Standard & Poors said the ratings on Charlotte, N.C.-based Horizon Lines LLC reflect its high debt leverage, participation in the capital-intensive and competitive shipping industry, and relatively older fleet. These risks are somewhat offset by the barriers to entry afforded by the Jones Act (which applies to intra-U.S. shipping) and stable demand from the company's diverse customer base across the company's various markets.
Horizon Lines is one of the leading ocean cargo carriers operating between the Continental U.S. and Alaska, Puerto Rico, Hawaii, and Guam. Horizon Lines operates under the Jones Act, which requires cargo shipments between U.S. ports to be carried on U.S.-built vessels registered in the U.S. and crewed by U.S. citizens.
The Jones Act provides a barrier to entry by prohibiting direct competition from foreign-flagged vessels. The company operates 16 containerships, with at least a one-third market share in each of its shipping lanes. Horizon Lines was formerly CSX Lines LLC, a subsidiary of CSX Corp., until The Carlyle Group purchased 84.5% of the company in February 2003.
Standard & Poors says the shipping industry is very capital-intensive, requiring large, cyclical outlays for oceangoing vessels. It says that management expects the existing vessels to continue to operate for another four or five years before requiring replacement.
In general, says Standard & Poors, the container shipping industry is more concentrated than most other shipping sectors, with the U.S. liner trade even more concentrated than the overall industry. Operating margins before depreciation and amortization have averaged 13% over the past few years, adequate for a shipping company. Margins have increased gradually as market conditions in Puerto Rico strengthened following the exit of a major competitor in 2002, and supplemented by improved operating efficiency. For 2003, EBITDA interest coverage was 2.5x, and funds from operations to debt was 28%. At March 31, 2004, lease-adjusted debt to capital was 75% and debt to EBITDA was 3.5x, both appropriate for the current rating. Future credit measures will be determined by acquisition financing.