TEXT-S&P affirms Kirby Corp's 'A-' rating

Thu Nov 29, 2012 2:25pm EST

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 
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