Standard & Poor’s Ratings Services recently revised its outlook on Horizon Lines Inc. to positive from stable. At the same time, the ‘B’ corporate credit rating was affirmed. The outlook revision reflects Horizon Line’s solid operating performance and improving financial profile.
“Ratings on Horizon Lines reflect its aggressive financial profile, modest financial flexibility, participation in the capital-intensive and competitive shipping industry, and an aging fleet,” said Standard & Poor’s credit analyst Eric Ballantine. Positive credit factors include barriers to entry afforded by the Jones Act and stable demand from the company’s diverse customer base across its various markets.
Horizon Lines is the largest Jones Act cargo shipping company and transports goods between the continental US and Alaska, Puerto Rico, Hawaii, and Guam. Competition from other modes of transportation is limited because of cost and geographic considerations. The company operates 16 containerships, with at least a one-third market share in each of its shipping lanes. On the Alaskan routes, Horizon Lines faces competition from only one containership competitor, Totem Ocean Trailer Express Inc. Similarly, Horizon Lines faces competition from one carrier to Hawaii and Guam, Matson Navigation Co. Inc., a subsidiary of Hawaii-based Alexander & Baldwin Inc. Horizon Lines is one of four carriers serving Puerto Rico.
The shipping industry is very capital-intensive. Although Horizon Lines’ vessels average over 29 years in age and its oldest vessels are over 35 years old, the company’s routine maintenance programs have kept its vessels in good operating order, although they are more expensive to operate than newer vessels. In the intermediate-to-long term, the company will likely replace some of its older vessels, which could increase debt levels; however the replacement of vessels is expected to take place over time.
Continued improvement in operating results and debt reduction could result in a modest one-notch upgrade in the near term. If debt leverage were to increase significantly from current levels, or financial performance fall below expectations, the outlook could be revised to stable. An outlook change to negative in the near term is less likely.