Tuesday, March 29, 2011

Horizon Lines In Troubled Waters

Horizon Lines (HRZ), in a development befitting its name, is preparing to sail over a horizon every shipping company dreads:

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.

The shipper is trying to stave off insolvency by extending a consent solicitation for some convertible senior notes, but that may not provide the liquidity needed.  What went wrong?  Gross revenue has been consistently between $1.1B to $1.3B for four years, but net income has been negative since 2009.  Given the small amounts of cash Horizon has kept on hand (under $4.6mm) for the past year, it's easy to see how a legal penalty can sink this ship. 

Horizon (or its physical assets) may be an attractive purchase if it declares bankruptcy.  The company's remaining debt load from accounts payable could be manageable for an acquirer provided its long-term debt is wiped out.  An acquirer will also have to boost Horizon's capital spending, which has declined by 16% in five years.  Shippers looking to add Horizon's 18,500 or so containers to their fleet need only hang around corporate HQ in Charlotte, NC to see if they'll be available at a bargain price. 

Full disclosure:  No position in HRZ.