It’s been a wild year for Horizon Lines and Stephen H. Fraser, the executive who has led the largest Jones Act container line from the brink of bankruptcy to relative stability.
Horizon this month completed a second debt-to-equity conversion that reduced the company’s debt by one-third since the end of 2011. The carrier also extricated itself from $35 million in annual costs related to charters for ships from its discontinued trans-Pacific service.
“Now we’re a more financially secure business partner,” said Fraser, Horizon’s president and interim CEO. “These transactions have removed the major obstacles. We believe we have our financial house in order, and we can focus on serving our customers.”
Horizon was on the ropes when Fraser took charge in March 2011 following the resignation of longtime CEO Chuck Raymond. The carrier had just pleaded guilty to a felony antitrust charge for price-fixing in the U.S. mainland-Puerto Rico trade and faced possible debt default and bankruptcy.
Fraser said Horizon’s objectives were to settle the antitrust case and related civil lawsuits, refocus the carrier’s efforts on its core Jones Act trades, and strengthen the company’s shaky balance sheet.
It was touch and go for months as Horizon fought to refinance its debts, work out settlements with the Justice Department and with customers that filed civil antitrust lawsuits, and deal with operating losses stemming from soft domestic business and a disastrous venture into the trans-Pacific trade.
The big financial breakthrough came last October when Horizon pulled off a complicated $652 million refinancing that exchanged debt for equity. The transaction wiped out most of the value of existing stock, but provided breathing room from creditors.
Horizon also discontinued its logistics operation and scuttled its U.S.-flag trans-Pacific service, which carried domestic cargo from the West Coast to Guam and international shipments from China to the West Coast on ships capable of carrying 2,800 20-foot equivalent units. Horizon took over the service after Maersk canceled its take-or-pay agreement for the ships’ eastbound capacity.
Despite its cancellation of the trans-Pacific service, Horizon was still on the hook for charters of the ships. Ship Finance, the ships’ owner, this month agreed to take the vessels back in exchange for $40 million in second-lien notes and warrants equal to 10 percent of Horizon’s stock.
The deal relieved Horizon of $32 million in annual charter costs, plus $3 million a year in layup expenses. “We were looking at approximately $35 million a year, which we absolutely needed to deal with,” said Michael T. Avara, executive vice president and chief financial officer.
Simultaneously with the deal for the chartered ships, Horizon announced a second debt-for-equity deal that cut the company’s total funded debt by $228.4 million. Combined with the $40 million in new notes to Ship Finance, the net debt reduction was $188.4 million. Horizon’s total debt now stands at $404.5 million.
“This is the last chapter, we believe, in a long process of dealing with the negative overhanging issues that have faced the company,” Fraser said. “We find ourselves prepared and equipped to focus on our business without distraction.” He plans to resign when Horizon hires a permanent CEO “in the near future.”
Avara said Horizon hopes in a year or so to seek an upgrade in its bond ratings, which stand at junk levels, and refinance its debt, much of which carries interest rates of 13 to 15 percent.
Horizon’s fourth quarter report said the company was considering asset sales. Avala said these would be limited to about $6 million worth of cranes in Guam and other equipment left over from the trans-Pacific service.
Excluding its discontinued trans-Pacific and logistics operations, Horizon’s fourth quarter loss on continuing operations narrowed to $6.9 million from $33 million a year earlier as volume and rates rose marginally. Adjusted earnings before interest, taxes, depreciation and amortization fell to $18.9 million from $19.8 million. Operating revenue rose to $261.4 million from $256.1 million.
For the year, Horizon’s adjusted EBITDA totaled $82.1 million, down from $106 million in 2010. The company forecasts adjusted EBITDA this year of $75 million, which includes about $11 million in costs for maintenance dry-docking of some of the carrier’s Puerto Rico ships in China.
Horizon eventually must address fleet replacement. The company’s three newest ships, used in the Alaska trade, were built in 1987. The rest of Horizon’s active fleet averages 36 years old. Four other vessels, built between 1968 and 1973, are idle and used for spare parts.
Horizon officials say the company has several years to decide what to do about fleet replacement. The Jones Act requires ships in the domestic trades between U.S. ports and territories to be U.S.-built.