Horizon Lines shareholders jump ship on bankruptcy fears

Shares in Jones Act containership operator Horizon Lines (NYSE:HRZ) plummeted today after it filed its 10K with the SEC.

You can download the 10 K here. But here’s one example of what had investors running for the exit, the key phrase being “raise substantial doubt about our ability to continue as a going concern.”

We believe that our financial position will be impacted during the second and third quarters of 2011. First, we expect that we will experience a covenant default under the indenture related to our $330.0 million aggregate principal amount of 4.25% Convertible Senior Notes due 2012 (the “Notes”). On March 22, 2011, the Court entered a judgment against us whereby we are required to pay a fine of $45.0 million to resolve the investigation by the U.S. Department of Justice into our domestic ocean shipping business. In March 2011, we solicited consents from the holders of the Notes to waive the default that may arise in connection with that judgment. We have until May 21, 2011 to satisfy the judgment or otherwise cure the default under the indenture relating to the Notes, and, as of the date of this filing, we have not been able to obtain a waiver from the holders of the Notes and do not presently have remedies to cure the default. Acceleration of all principal and interest may be pursued by the indenture trustee in the event of default. Should the indenture trustee pursue an acceleration, such an action would create a default in our Senior Credit Facility and other loans and financing arrangements due to cross default provisions contained in those agreements.

Second, although we amended our Senior Credit Facility in March 2011, we expect to not be in compliance with the revised covenants beginning in the third quarter of 2011. We expect our financial results will be negatively impacted by softness in international rates, as well as by volatile fuel prices and by our ability to revise fuel surcharges accordingly. Noncompliance with the financial covenants in the Senior Credit Facility constitutes an event of default, which, if not waived, could prevent us from making borrowings under the Senior Credit Facility. We anticipate working with our lenders to obtain amendments or to refinance prior to any possible covenant noncompliance; however we cannot assure you that we will be able to secure such amendments or a refinancing.

Due to these expected and potential defaults, we have classified our obligations under the Notes and the Senior Credit Facility as current liabilities in the accompanying Consolidated Balance Sheets as of December 26, 2010.

Our independent registered public accounting firm has issued an opinion on our consolidated financial statements that states the consolidated financial statements were prepared assuming we will continue as a going concern and further states that uncertainties regarding our ability to remain in compliance with certain debt covenants under our Senior Credit Facility throughout 2011 and our ability to cure a potential acceleration under our Notes raise substantial doubt about our ability to continue as a going concern.

Our ongoing activities to address these matters include, but are not limited to, working with our lenders to obtain amendments or waivers and seeking refinancing sources to address our existing capital structure. We have retained Moelis & Company as financial advisors to help us in these efforts.

March 29, 2011