Horizon Lines said it expects to default on its loans as the result of a $45 million fine for price-fixing in the Puerto Rico trade and could be forced into bankruptcy if a deal can’t be worked out with lenders.
There is “substantial doubt” about the company’s ability to continue as a going concern, the company’s outside accountant said in a note to Horizon’s annual report for 2010.
“We do not expect to be in compliance with our debt agreements in 2011,” Horizon said in the report. Holders of $330 million in Horizon’s convertible senior notes have refused to grant a waiver from a default threatened by the price-fixing fine.
Horizon said it has until May 21 to cure the default but has “not been able to obtain a waiver from the holders of the notes and (does) not presently have remedies to cure the default....If waivers or other relief or not obtained, we could be forced to seek reorganization under federal bankruptcy laws.”
A default on the $330 million in bonds would also trigger a default on a senior credit facility for which the company recently persuaded lenders to grant default waivers. Horizon said it was working to refinance its debt and is “exploring other options” but expects to default on the senior credit facility in the third quarter of this year.
"These conditions and their impact on the company's liquidity raise substantial doubt about Horizon Lines Inc.'s ability to continue as a going concern," Ernst & Young said in a note attached to the company's annual report, which was filed Tuesday a month after its scheduled release date.
Horizon owes $576.6 million in principal on its convertible senior notes, term loans and revolving credit facility and has borrowed most of its available credit under its revolving credit facility.
The company has been struggling to control damage from its guilty plea, which resulted in a $45 million fine spread over five years with only $1 million due up front. The Justice Department said sentencing guidelines called for a fine of $336 million to $672 million but that the back-loaded $45 million was the most Horizon could pay without threatening the company's viability.
Simultaneously with its guilty plea last month, Horizon announced the retirement of CEO Chuck Raymond and the placing of John Keenan on leave as chief operating officer. The company also warned of weak operating results in the first quarter.
Horizon's results this year "will be negatively impacted by softness in international rates, as well as by volatile fuel prices and our ability to revise fuel surcharges accordingly."
The company said the rate environment for its eastbound China-U.S. service, which uses space Maersk Line previously chartered on a take-or-pay service, has softened since its most recent analysts' call on March 3, and that Horizon is "uncertain of implications for the May contracting season as well as for the peak season in the summer."
Although Horizon has settled its criminal charges in Puerto Rico, it still faces civil claims filed on behalf of shippers in the wake of the criminal investigation. The company said it was continuing to negotiate with shippers that opted out of a class action settlement in which Horizon agreed to pay $20 million.
In San Juan last week, a federal judge agreed to extend until April 29 the deadline for Horizon and two other carriers, Sea Star and Crowley, to decide whether to proceed with class action settlements totaling $52.25 million.
Horizon said it had settled for unspecified terms with Wal-Mart, one of the shippers that opted out of the class action settlement, and was pursuing agreements with other shippers that opted out of the class action.
“In some cases, we have agreed to, or are seeking to agree to, future discounts which will be charged against operating revenue if and when the discount is earned and certain other conditions are met,” Horizon said.
-- Contact Joseph Bonney at firstname.lastname@example.org.