Nov 29 - Fitch Ratings has revised the Rating Outlook on Kirby Corp.
to Stable from Positive and affirmed the ratings at 'BBB'. The revision in
Outlook follows Kirby's recently announced acquisition of Penn Maritime (Penn)
for $295 million. The acquisition will be funded with debt through a $500
million private placement of senior unsecured notes with $300 million intended
for the acquisition and $200 million to pre-fund the company's February 2013
note maturity. Additional debt from this transaction and the recent acquisition
of Allied Transportation Co (Allied) could push Debt/EBITDA above 2.2x by
Fitch has also assigned a rating of 'BBB' to the new $150 million seven-year and
$350 million 10-year senior unsecured notes. The notes feature 2.72% and 3.29%
coupons, respectively, and rank equally in priority to the senior unsecured debt
currently outstanding. A full rating list is shown at the end of this release.
Kirby's Outlook was revised to Positive in March of 2012 under the rationale
that the increased size of the company following the purchases of K-Sea
Transportation and United Holdings put Kirby in a better position to absorb
future acquisitions without materially increasing the risk profile of the
company. While this remains true, the increase in leverage relating to the
current round of acquisitions combined with other adverse industry conditions
and increasing uncertainty in the general economy make it less likely that the
company will merit an upgrade in the near term.
The Outlook also reflects concerns that future growth in this industry will
likely continue to be acquisition driven. Upwards rating movement will be
limited if future acquisitions keep leverage above historical levels.
The Penn acquisition should ultimately be viewed favorably despite the temporary
increase in leverage, due to its complementary nature to Kirby's existing
coastwise business. This will be particularly true as the remaining single-hull
barges in operation are retired in the coming years and utilization trends
Penn Maritime is a leading coastwise barge operator with a fleet of 18
double-hulled barges in the 80-120 thousand barrel range and 16 tugs. The fleet
is relatively young, with most barges being built within the past 10 years. Penn
primarily hauls black oil products including liquid asphalt, fuel oil, and feed
stock. This complements Kirby's other recent coastwise acquisitions which mainly
deal in refined petroleum products (K-Sea, purchased in July 2011) and chemicals
(Allied, purchased in November 2012). The addition of black oil product capacity
in the coastwise market helps Kirby to replicate its successful inland business
in the coastwise market by offering a full array of liquid hauling services.
Kirby also recently completed the acquisition of Allied, a smaller coastwise
operator dealing in petrochemicals and bulk sugar. The purchase price was $116
million, $10 million of which is to be paid contingent upon developments in
sugar provisions in the U.S. farm bill. The Allied acquisition was funded
through Kirby's revolver.
In addition to higher leverage, there are several operating factors causing
weaker than expected results which contribute to the revised Outlook. Recent
headwinds have included higher than expected integration and maintenance costs
related to the 2011 acquisition of K-Sea, a larger than anticipated slow-down in
the diesel engine services business related to reduced fracking activity, and
adverse conditions caused by low water on the Mississippi river system.
Kirby's land-based diesel engine services business (formerly United Holdings) is
struggling from a sharp downturn in orders for new hydraulic fracturing
equipment. Persistently low natural gas prices experienced through the year have
caused new drilling activity in North American shale gas formations to fall off
more quickly than anticipated. Kirby's expectation for this business is a
transition to a primarily service and overhaul-based model, deemphasizing the
manufacture of new equipment. However, adverse conditions have forced the
company to make this transition sooner than expected, causing near-term
headwinds. Total third quarter revenues for the diesel engine services segment
(including offshore) were down by 19% vs. the same period in 2011.
The integration of K-sea has also been costlier than originally estimated.
Maintenance costs related to K-Sea's fleet have been higher than anticipated,
putting pressure on cash flow expectations for the year. Fitch ultimately
expects that the addition of K-Sea will be positive, expanding the breadth of
Kirby's market. However, additional costs in the near term make it more likely
that meaningful leverage reduction will take longer than initially anticipated.
Kirby's legacy inland marine business continues to perform well. Barge
utilization rates on the inland waterways remain high, and the pricing
environment has proven resilient throughout the first part of the year with
revenue per ton mile continuing to increase from recession levels. The positive
operating environment is somewhat offset by low water conditions on the
Mississippi river system caused by this summer's drought. Low water forced Kirby
to light-load many of its barges throughout the summer months, persisting
through the third quarter, leading to a notable drop in total ton miles. Kirby
reports that water conditions cost the company roughly $0.5 million per month in
Increased capital spending and lower than expected revenues will pressure free
cash flow (FCF) in the near term. Fitch expects FCF for full-year 2012 to fall
below the $86 million generated in 2011. Free cash should see significant
improvement in 2013 and beyond as capital spending turns sharply lower, with
Kirby completing much of its planned fleet renewal in 2012. Meaningful FCF
generation in the coming years should allow Kirby to de-lever from the current
round of acquisitions.
Kirby's financial flexibility remains adequate. The company had a cash balance
of $5.1 million and revolver availability of $229 million ($325 million less $92
million outstanding and $3.6 million in letters of credit) as of Sept. 30, 2012.
Kirby utilized the accordion feature under its revolver to expand total capacity
to $325 million from $250 million along with the Allied acquisition. Subsequent
to quarter-end, revolver availability was reduced by roughly $106 million due to
the Allied acquisition. However, Fitch expects Kirby to direct near-term FCF
towards paying down the outstanding balance. Future debt maturities are
manageable with the February 2013 maturity of Kirby's $200 million notes being
pre-funded by the planned issuance. There are no other major maturities until
Kirby's term loan expires in 2015.
What could trigger a rating action:
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
--Leverage being reduced and maintained below 1.5x;
--An effective integration of the recent acquisitions;
--Improved free cash flow.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
--Additional debt funded acquisitions;
--A shift in cash distribution priorities away from deleveraging the balance
Fitch has affirmed Kirby Corporation's ratings as follows:
--Issuer Default Rating at 'BBB';
--Senior Unsecured Credit Facility at'BBB';
--Senior Unsecured debt at 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology