Horizon Lines expects to default on its debt covenants this year, a development the company’s accountant says raises “substantial doubt” about the largest U.S. domestic ocean carrier’s ability to remain a going concern.
The disclosure was the latest in a series of recent shocks for Horizon, which has a 36 percent share of Jones Act services to Puerto Rico, Hawaii, Alaska and Guam. During the last six weeks, Horizon has pleaded guilty to a felony antitrust charge, replaced its top executives and warned of a “challenging” 2011.
Horizon’s stock plunged nearly 50 percent and its debt ratings were knocked deeper into junk status March 29 after the company said it had failed to persuade bondholders to waive a default triggered by a $45 million fine for fixing prices in the Puerto Rico trade.
In its annual report, the company said it expects to default on $330 million in convertible senior notes in the second quarter. The default would allow bondholders to demand accelerated payment that would trigger a separate default on the company’s senior credit facility.
Default on the senior credit facility is expected in the third quarter, Horizon said. “If waivers or other relief are not obtained, we could be forced to seek reorganization under federal bankruptcy laws,” the company said.
“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,” accounting firm Ernst & Young said in its note attached to the annual report.
Horizon said it is working with lenders to obtain amendments or waivers as it pursues a range of refinancing possibilities. It has retained Moelis & Co., which worked in the debt-to-equity conversion of financially struggling trucking company YRC, as financial advisers.
The company is “looking at a variety of creative options,” said Stephen Fraser, appointed as interim successor to longtime CEO Chuck Raymond, who retired in February on the heels of the antitrust penalty. Fraser declined to discuss specifics of the refinancing efforts.
“We are operating with adequate liquidity,” he said. “Our underlying business remains strong. We are not changing our service levels or the way we operate our business and have served our customers for more than 50 years.
“This is not a solvency-of-business issue,” Fraser said. “This has to do with how we are able to manage our debt and operating performance as it relates to fuel prices and trans-Pacific revenue per box.”
Because of the expected defaults, Horizon reclassified its convertible notes and senior credit facility, which represent most of the company’s long-term debt, as current liabilities on its balance sheet.
In addition, Horizon said it’s being hit by rising fuel prices that surcharges can’t immediately cover and by a deteriorating rate outlook in the trans-Pacific market, where Horizon launched a China-to-U.S. route in December, using ships with capacities of 2,800 20-foot-equivalent container units.
The China service is an extension of Horizon’s westbound service from the West Coast to Guam. Until this year, the carrier chartered its eastbound space to Maersk Line under a take-or-pay contract. Now Horizon is marketing its own service, touting an 11-day transit time from Shanghai to Los Angeles.
Eastbound trans-Pacific rates have dropped about 25 percent in the last month, forcing Horizon to offer a cautious outlook in its annual report, company officials said. The carrier said it is “uncertain of implications for the May contracting season as well as for the peak season in the summer” and that results this year “will be negatively impacted by softness in international rates.”
Horizon in February agreed to plead guilty to violating antitrust laws by fixing prices in the Puerto Rico trade from 2002 to 2006 and was sentenced to five years’ probation and 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 the back-loaded $45 million was the most Horizon could pay without threatening the company’s viability.
Separately, Horizon is negotiating with shippers that opted out of a class action settlement in which Horizon agreed to pay $20 million to settle civil antitrust lawsuits arising from the Puerto Rico case. Horizon and two other carriers, Sea Star and Crowley, have until April 29 to decide whether to proceed with 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, and was pursuing agreements with other shippers. The carrier said that in some cases it had agreed to or was offering discounts on future shipments.
Contact Joseph Bonney at email@example.com.