Horizon Lines converts debt to stock and reaches deal with Ship Finance to terminate charters

Horizon Lines, Inc. (OTCQB: HRZL) says that it has completed transactions with more than 99 percent of its noteholders, and with Ship Finance International Limited, to substantially deleverage the company’s balance sheet and terminate vessel charter obligations related to its discontinued trans-Pacific service.

The simultaneous transactions eliminate virtually all of the remaining $228.4 million of the Horizon’s 6.00 percent Series A and Series B Convertible Secured Notes, though this is partly offset by the issuance of $40.0 million of debt to SFL as part of the full and final settlement of the vessel charter obligations, resulting in a net debt reduction of $188.4 million.

Horizon says its earnings and cash flows will be further improved by the termination of $32.0 million in annual vessel charter obligations for the five ships leased from SFL, as well as the elimination of approximately $3.0 million of annual lay-up costs for the idle vessels.

“These transactions successfully close a chapter in the history of Horizon Lines that we have been working diligently to complete for these past many months,” said Stephen H. Fraser, interim President and Chief Executive Officer. “Horizon Lines moves forward today from a stronger financial position that will enable us to better focus on customers in our core Jones Act trades and to invest in the future of our business. We greatly appreciate the support of our noteholders and SFL during the final steps of this process, and also thank our associates, customers, labor partners, and vendors for their loyalty and faith in Horizon Lines.”

Under the transactions announced today:

• Substantially all of the remaining $228.4 million of the company’s 6.00 percent Series A and Series B Convertible Senior Secured Notes are being converted into stock, or warrants for non-U.S. citizens, equivalent to 83.5 percent of the company’s common stock on a fully converted basis.
• Subsidiaries of SFL are releasing the company from its remaining charter obligations, totaling $220.8 million over seven years. In exchange, the company has provided SFL with $40.0 million in aggregate principal amount of Second Lien Senior Secured Notes due 2016 pursuant to the Indenture dated October 5, 2011, plus warrants equivalent to 10.0 percent of the company’s shares outstanding on a fully converted basis upon completion of the transaction.
• Existing holders will maintain a stake of 6.5 percent in the company’s stock. This includes approximately 1.4 percent for existing equity holders and approximately 5.1 percent for noteholders who received stock or warrants in the October 5, 2011 refinancing and as part of the mandatory debt-to-equity conversion on January 11, 2012. Upon completion of the transactions, the noteholders and SFL, respectively, will own stock and warrants equivalent to approximately 88.6 percent and 10.0 percent, of the company’s common stock on a fully converted basis.
• In addition, 7.5 million authorized, but unissued shares, are being reserved for future management incentive plans.

The elimination of the vessel lease obligations saves Horizon Lines $32.0 million annually through 2018, and $4.8 million in 2019, as well as associated vessel lay-up costs of $3.0 million per year, assuming the five vessels were to remain inactive. As a result of the transactions, the company’s total funded debt outstanding will be reduced to approximately $404.4 million, from $592.8 million at March 31, 2012.

“The significant deleveraging resulting from these transactions greatly improves the company’s cash flow and liquidity, allowing for greater financial flexibility and stability,” said Michael T. Avara, Executive Vice President and Chief Financial Officer. “As a result, Horizon Lines is now better positioned for improved profitability and sustained investment in our business.”

The company will file its 2011 Form 10-K Annual Report and fourth-quarter financial results later today.

In conjunction with the transactions, Horizon Lines announced that it is reducing the size of its Board of Directors to seven members from 11, effective immediately, and that Board member Jeffrey A. Brodsky is succeeding Alex J. Mandl as Chairman. Mr. Mandl is retiring from the Board, along with William J. Flynn, Bobby J. Griffin and Carol B. Hallett. Mr. Fraser remains interim President and Chief Executive Officer until a new Chief Executive Officer is named.

Ship Finance International Limited (NYSE:SFL) said that in return for terminating chartering agreements with Horizon Lines, LLC  relating to five of its vessels it will receive as termination compensation $40 million in second lien notes issued by Horizon Lines and warrants exercisable into ten percent of the common stock of Horizon Lines, Inc.

The 2,824 TEU vessels were built in Korea in 2006 and 2007, and have been chartered to Horizon Lines for an average of approximately 5 years. The original bareboat charter term was for 12 years, but following the termination of the Horizon Lines charters, Ship Finance will employ the vessels in the time-charter market instead. The break-even rate per day per vessel (after interest, debt amortization and estimated operating expenses) will be approximately $10,500 for the first 18 months and thereafter approximately $14,500 per day for the next 66 months.

The $40 million of notes that Ship Finance will get will be part of a total of approximately $140 million of second lien notes, and junior to approximately $225 million of first lien notes.  The notes will mature in October 2016 and interest is payable semi-annually, the first payment being due in October 2012. The annual interest rate will be 13 percent if paid in cash, 14 percent if paid 50/50 in cash and newly issued bonds and 15 percent if paid in newly issued bonds only.

As security for the bonds, Horizon Lines has pledged essentially all of its assets, including 12 owned vessels in its U.S. Jones Act business.  Horizon Lines will have the option to redeem the notes at 106 percent starting in October 2013, at 103 percent starting in October 2014 and at par starting in October 2015.

CEO of Ship Finance Management AS, Ole B. Hjertaker, said in a comment:  “We are pleased with the outcome of this comprehensive restructuring of Horizon Lines. The vessels are only five years old on average and of good quality and design. Even though the container chartering market currently is soft, we believe there is a good potential for improvements from current levels and our break-even rates are significantly below the historical average.”

Mr. Hjertaker continued: “The redelivery of the five vessels to Ship Finance will enable Horizon Lines to focus entirely on its core domestic U.S Jones Act container market, and Horizon Lines should be well positioned to deliver positive results going forward. Ship Finance will become a large stakeholder in the restructured Horizon Lines and expects to benefit from both the interest on the notes as well as the value of securities received.”

April 10, 2012