The following article was written in and is found in the Journal Of Commerce:
Analyst: Horizon Lines faces debt crisis
Joseph Bonney, Senior Editor | Jul 14, 2014 11:35AM EDT
Horizon Lines will have difficulty refinancing its heavy debt during the next two years and may be forced to shed assets, a move that would shake up the Jones Act domestic trade, analysts from BB&T Capital Markets said.
“If Horizon Lines cannot refinance its debt obligations, which come due in 2016, we believe the balance of supply and demand will tip in favor of the remaining vessel operators” in the Jones Act trade, BB&T said in a research note.
“Our sense is Horizon will no longer be able to kick the can down the road because the company’s debt obligations keep growing, increasing at double-digit interest expense, and that Horizon will have to shed assets,” BB&T said.
Horizon skirted bankruptcy in 2011 with a refinancing that left the company with a heavy load of high-interest debt. BBT noted that the company has more than $100 million in interest debt obligations due in each of the next two years and more than $600 million due in 2016.
The company’s earnings before interest, taxes, depreciation and amortization were $95.3 million in 2013, and are expected to be only $85 million to $95 million this year, BBT said.
Horizon posted a GAAP operating loss of $8.6 million in the first quarter, compared with a loss of $4.3 million a year earlier.
“The company continues to incur debt to help fund operations, and as it struggles to turn a profit, we expect the debt load will rise and with an aging fleet in need of repair and overhaul and significant capex requirements, the ability to successfully turnaround the company is a challenge to say the least,” BB&T said.
Horizon’s ships have an average age of 37 years, making its fleet among the oldest of any liner company in the world. They compete in Puerto Rico, Hawaii and Alaska markets where competition is increasing and rivals are introducing modern ships.
Horizon’s future has been the subject of industry speculation since Sam Woodward, the company’s CEO, resigned June 27 with a year left on his contract. Board member Steve Rubin, principal of intermodal consulting firm InterPro Advisory LLC, was named interim CEO.
Rubin could not be reached for comment today.
Six former executives of Horizon and Sea Star Line were sentenced to prison in connection with a price-fixing scheme that began after Navieras exited the Puerto Rico market in 2002 and continued until federal agents raided company offices in 2008. Horizon, Sea Star and Crowley pleaded guilty to antitrust violations.
The market for carriers serving Puerto Rico’s depressed economy is “oversaturated,” BB&T said. Sea Star and Crowley have announced LNG-powered vessels that will compete with Horizon’s aging ships.
Horizon also faces challenges in the Hawaii market, where Pasha is introducing a second ship, and Alaska, where TOTE soon will have LNG-powered ships that unlike Horizon’s will comply with new emissions requirements.
The aging ships in Horizon’s fleet don’t comply with environmental rules that will require Jones Act domestic vessels to use LNG or low-sulfur diesel by 2020.
“Any way you slice it, Horizon Lines is looking at a significant capex spend the next couple of years just to bring all of the company’s vessels into compliance with current environmental laws,” BBT said.
BB&T said that with the carrier&rsquos competitive and capital investment challenges and $500 million in debt as of the first quarter, “it is hard for us to envision how Horizon turns things around.”
