$220 million first lien term loan due 2018 upgraded to B2
New York, May 05, 2014 -- Moody's Investors Service raised its ratings assigned to U.S. Shipping Corp ("USSC"): Corporate Family Rating (CFR) to B3 from Caa1; Probability of Default Rating (PDR) to B3-PD from Caa1-PD; and first lien senior secured rating to B2, 39-LGD3 from B3, 40, LGD3. The outlook is stable.
The upgrade of the ratings follows the company' steady operating performance through 2013, maintaining high utilization of its seven US Jones Act qualified vessels and generating modest positive free cash flow generation. We expect demand for the company's vessels to remain strong through at least 2015, facilitating modest expansion of margins and ongoing free cash flow that will be applied to debt reduction, leading to further strengthening of credit metrics within the single B rating category.
The B3 CFR balances the company's small size, mid- to low-single B credit metrics profile and favorable fundamentals of the US Jones Act shipping sector. The US' shale oil revolution, reductions in refinery capacity in the mid-Atlantic states and strong petrochemical production supported by relatively low natural gas prices will continue to sustain demand for coastwise transportation of crude, refined products and chemicals. The company's vessels ply mainly in the chemical trade and mostly under contracts, making them less susceptible to potential fluctuations in demand for coastwise movements of crude or refined products than those operators focused on these commodities. We anticipate that USSC will be able to modestly expand revenues and EBITDA generation through 2015 as demand growth continues to outstrip supply growth in the US Jones Act market in upcoming years. However, new vessels will enter the U.S. Jones Act fleet in upcoming years, which could push older tonnage into the chemical trades, possibly increasing competition for USSC. We also expect free cash flow generation to fluctuate with the number of dry-docks performed each year and in years when any of the three older tankers go through their dry-docks. Liquidity is adequate.
The stable outlook reflects Moody's belief that the majority of USSC's fleet is likely to remain on contract with freight rates that allow the company to achieve about $15 million to $20 million of annual free cash flow in years when dry-dockings of the company's older vessels do not occur. Free cash flow should remain positive in years when the older vessels are dry-docked.
A positive rating action could occur if USSC was to strengthen its credit metrics profile, such as having Funds from Operations + Interest to Interest approach 3.0 times and Debt/EBITDA below 5.0 times. The chartering strategy locks in the majority of the company's revenue for upcoming years, leaving limited opportunity to trade its way to a stronger credit metrics profile with its current fleet. A negative rating action could occur if the company does not maintain strong daily utilization of the fleet such that it sustains negative free cash flow. Debt-funded fleet growth could also pressure the rating as could a weakening of credit metrics, such that Debt to EBITDA was sustained above 6.0 times or Funds from Operations + Interest to Interest approached 1.0 time.
U.S. Shipping Corp, headquartered in Edison, NJ, owns four articulated tug-barge units and three tankers serving the US Jones Act chemical and petroleum markets.
The principal methodology used in this rating was the Global Shipping Industry published in February 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.