TEXT-S&P affirms Kirby Corp's 'A-' rating
Overview -- Houston-based marine transportation company Kirby Corp. is acquiring Penn Maritime Inc. and Maritime Investments LLC. for $295 million in a majority debt-financed deal. -- Kirby's credit measures are strong for the rating and although we expect credit measures to weaken slightly due to the debt-financed acquisition, we expect the company to use its strong earnings and cash flow to pay down debt. -- We are affirming our 'A-' long-term corporate credit rating on Kirby. -- The stable outlook reflects our expectation that the company's earnings will increase, enabling the company to reduce debt and restore its solid financial profile. Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services affirmed its 'A-' long-term corporate credit rating on Kirby Corp. The outlook is stable. Rationale We are affirming our ratings on Kirby because we believe that the company's financial profile will gradually improve with higher earnings and strong cash flow generation. Our rating action takes into account Kirby's announcement on Nov. 27, 2012, that it is acquiring Penn Maritime Inc. and Maritime Investments LLC (collectively, Penn Maritime), (both not rated) for $295 million. Penn Maritime operates tank barges and tugboats in the coastal transportation of primarily black oil products in the U.S. Kirby will finance the acquisition with a combination of debt and equity. Kirby will issue $500 million senior unsecured notes (not rated), of which up to $300 million will be used to fund the Penn Maritime acquisition and the balance of about $200 million will be drawn in February 2013 to refinance existing $200 million senior notes (not rated). The ratings on Kirby reflect the company's strong position in the domestic inland and coastal bulk liquid barge industries; its solid balance sheet; and stable revenues under mostly fixed-rate, long-term contracts. During 2012 on average, about 75% of the transportation segment revenues came from contracts; the company generated 25% on a spot basis (i.e., based on real-time rates), as was the case last year. Standard & Poor's expects the company to keep a similar distribution over the next year. Exposure to moderate cyclical demand swings in certain markets, ongoing investment and acquisitions, and the competitive nature of the industry somewhat offset these strengths. We characterize Kirby's business risk profile as "satisfactory," its financial risk profile as "modest," and its liquidity as "strong" under our criteria. Kirby currently operates about 27% of U.S. inland tank barges and is twice the size of the next largest competitor. Recent acquisitions increased the transportation segment's service offerings and geographical diversity. We believe the Penn Maritime acquisition will further enhance Kirby's already leading position in the U.S. coastal transportation of liquid bulk commodities. On Nov. 1, 2012, Kirby purchased Allied Transportation Co. and two affiliated companies (not rated) for $116 million (before post-closing adjustments and fees). Allied is a liquid bulk barge operator focused primarily in U.S. coastal trade with some offshore barge operations. The company also transports dry sugar products in the Northeast, Atlantic, and Gulf Coast regions. Following the acquisition of K-Sea Transportation Partners LLC in July 2011, Kirby became one of the largest operators of U.S. domestic coastwise liquid barges, with about 11% market share of coastwise transportation of oil and refined products (including transportation by tankers). Kirby is the only operator with a presence on the East Coast, West Coast, Alaska, and Hawaii. The 2011 acquisition of the bunkering assets of Enterprise Marine expanded operations into transportation and delivery services for ship bunker (engine fuel). With the 2011 acquisition of United Holdings, Kirby's engine services business expanded into land-based diesel engine manufacturing and services businesses. Although United Holdings diversified the company's sources of revenues, we consider this business to be somewhat more risky than Kirby's historical core inland barge business. As of Nov. 1, 2012, Kirby's active fleet consists of 853 inland tank barges supported by 246 towing vessels and 63 coastal tank barges supported by 63 tugboats and three offshore dry-bulk barges. The entire active inland tank barge fleet is double-hulled and has an average age of 18.9 years, in line with the national average of about 19 years. All but three of the coastal tank barges are double-hulled (a construction that reduces the risk of oil spills in case of an accident). The double-hull vessels have an average age of 9.6 years; the tugboats and towboats have an average age of 26.8 years and 31.1 years, respectively. Pro forma for the Penn Maritime acquisition, Kirby's fleet will expand by an additional 18 coastal tank barges and 16 coastal tugboats. Kirby faces some competition from other modes of freight transportation, including railroad tank cars, which are less cost-effective but a faster mode of transportation. As of Sept. 30, 2012, adjusted funds from operations (FFO) to debt was about 50% and debt to capital was 39%, appropriate for the rating. Kirby's credit measures have varied over time, reflecting the timing and size of acquisitions and investments, as well as the effect of fluctuating end-market demand and cyclicality on earnings. After taking into consideration potential moderate acquisitions, we still expect credit measures to improve over the next year with FFO to debt in the low-50% area and debt to capital of less than 40%. Liquidity Kirby has strong liquidity under our criteria. We believe its sources of cash will comfortably exceed its uses during the next 12 months. Liquidity sources include $5.1 million in unrestricted cash and $229.5 million in availability (after taking into account outstanding letters of credit) under the unrated $325 million revolving credit facility. Cash sources also include $500 million in expected proceeds from the soon-to-be-issued senior unsecured notes (unrated). We expect Kirby to generate sufficient cash flow for working capital purposes. We assumed capital spending at the high end of the company's stated range of $265 million to $275 million, primarily for fleet replacement and periodic dry-docking expenses and factored in the Penn Maritime acquisition. As a result, we expect the company to draw moderately on the revolver over the next year. In accordance with Standard & Poor's liquidity methodology and assumptions, we believe the relevant aspects of Kirby's liquidity include: -- Cash sources exceeding cash uses by more than 1.5x, the minimum for a strong designation, for the next year, and more than 1x over the next 24 months; -- Our expectation that net sources would be positive, even with a 30% drop in EBITDA--consistent with our criteria standard of 30%; -- Sufficient covenant headroom for forecast EBITDA to decline by 30% without the company breaching coverage tests, and debt 25% below covenant limits; -- Very prudent risk management, in our view, and the ability to absorb high-impact, low-probability events without refinancing; and -- Kirby's well-established solid relationships with banks, in our view, demonstrated its ability to arrange credit facilities. Kirby's credit agreement contains certain provisions, covenants, and restrictions customary for this type of debt, including restrictions on mergers and acquisitions, additional indebtedness, asset sales, dividends, investments, leases, and changes in business lines. The company's debt agreements do not contain rating triggers that could limit additional borrowings or accelerate the payment of any funds outstanding. In addition, the company must comply with interest coverage and debt to capital covenants. Kirby currently has considerable cushion against these covenants, and we expect it to remain in compliance. The covenants use different definitions of EBITDA and debt than Standard & Poor's does. Outlook The outlook is stable, reflecting our expectation that the company will gradually improve its financial risk profile as it repays debt from recent acquisitions, with support from strong cash flow and an expanding revenue base of mostly committed contract revenues. We could lower the ratings if earnings decline because of cyclical pressures or if further substantial debt-financed acquisitions cause FFO to total debt to fall below 45% for a sustained period. Given Kirby's history of acquisitions, we are less likely to raise the ratings unless the company's financial policy becomes conservative, such that FFO to total debt averages more than 60% and debt to capital averages less than 25%. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Kirby Corp. Corporate Credit Rating A-/Stable/-- Temporary telephone contact numbers: Funmi Afonja (646-341-1107); Anita Ogbara (917-837-9974). Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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