S&P Downgrades Horizon Lines Debt

Standard & Poor's Ratings Services on Wednesday lowered ratings on several types of Horizon Lines’ debt instruments.

The ratings agency said it downgraded the ratings because of what it called a “weaker-than-expected financial profile due to earnings pressures stemming from significantly reduced shipping volumes and the lower cushion under the company's financial covenants.”

The Jones Act ocean carrier lost $31.1 million in its fiscal second quarter ending June 21, 2009, but after excluding special charges had an adjusted net profit of $4.1 million, down more than 50 percent from the same quarter a year ago.

Horizon’s cash holdings fell from $5.5 million at the end of 2008 to $3.7 million at the end of its most recent quarter and the current portion of its long-term debt nearly doubled to $12.8 million over that time.

S&P lowered the carrier’s long-term corporate rating to 'B' from 'B+', and removed the ratings from CreditWatch, where they had been with negative implications on June 12.

It lowered the rating on the senior secured debt to 'BB-', two notches above the new corporate credit rating, from 'BB', while leaving the recovery rating on this debt unchanged at '1', indicating expectations of very high (90-100 percent) recovery in the event of a payment default.

It also lowered the rating on the senior unsecured notes to 'CCC+' from 'B-', two notches below the new corporate credit rating, while leaving the recovery rating on this debt unchanged at '6', indicating expectations of a negligible (0-10 percent) recovery in the event of a payment default.

It said the outlook is negative. "The negative outlook reflects our expectations that there could be further material weakening in the company's financial profile over the next year, if shipping volumes continue to fall, due to the effects of the U.S. recession," said Standard & Poor's credit analyst Funmi Afonja.

“If that occurred, causing debt to EBITDA to approach 9x, or causing a further tightening in the company's financial covenant cushion, we would likely lower ratings,” Afonja said.

“Our current ratings do not incorporate any material potential liquidity events or negative outcome that could result from the DOJ investigation. If the investigation resulted in a material fine or negative outcome, we might lower the ratings further.

"We could revise the outlook to stable if earnings and credit metrics strengthen as a result of improved market conditions, although we do not anticipate such an improvement over the near term," she said.