Horizon Lines, Inc.

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whether or not to divest underperforming business units or selling the entire business to a strategic buyer. Due to its high barrier to enter the market and stable market, to find a buyer is easy, but to find a buyer who is willing to pay a reasonable price would be difficult in the near term. However, the only realistic alternative to avoid a default in 2011 for Horizon is to restructure its capital. There are three options available for Stephen Fraser and the management team to consider:

Option 1: Issue New Equity

This option is to issue new shares of common stock to inject capital into the business. Horizon can use this new capital to pay its debt and give the business additional capital to grow the Jones Act vessels. This option is easy and requires no negotiations with existing debt holders, however, existing shareholders will face voting right dilution.

Option 2: File for Chapter 11

Horizon had the option of filing for protection under Chapter 11 of the U.S. Bankruptcy code. Fraser needs to file and reply on the bankruptcy judge to over the reorganization. Judge would request a plan of reorganization to present a blueprint of how to restructure the balance sheet to a manageable level of interest and principal payments – many debt claimants were asked to accept new securities that have less value than the face value of their claim. The amount received by debt holders will be different depend on the seniority of the claim. Eg: a senior secured lender may receive full cash payment for its claim, but a junior unsecured lender might receive a combination of new debt & equity of 40% of its original debt. The judge will act as a mediator in negotiation process between the two parties to come up with a compromise.

· Chapter 11 gives a failing company the chance to restructure and continue to operate as a viable enterprise, so the company can continue to pay its suppliers & employees than to allow the company to disintegrate in the chaos of unable to payback debt. Companies will continue to operate normally, customers will not aware of the reorganization process. The company can increase the size of new debt and issue new equity to raise additional capital.

Option 3: Restructure the Debt Directly

With the same objective as Chapter 11, negotiate a deal directly with the debt holders, an advantage over court fees and save time compared to Chapter 11. To be successful, Horizon needs to exchange its existing debt for a combination of new notes and common shares. Horizon can negotiate with debt holders to accept a new set of covenants and a longer maturity to lift the problem of cash flow shortage it faces currently. This option can lengthen the maturity of outstanding debt and reduce overall amount of debt outstanding, which means reducing the level of interest payments.

As part of restructuring, Horizon needs to fund new capital to pay off senior credit facility in 2012 and to grow the Jones Act business. The new capital can come from issuing new shares to public and shares to debt holders. It can also come from issuing new debt. But these approaches can be expensive and reflect high risks on Horizon to the public. Eg: given the current low share price of $0.85, the company needs to issue a large amount of new shares to raise a significant amount of capital. For the new debt, new debt holders may require collateral for the debt and a higher interest rate range from 10% to 15%.

Possible drawbacks of restructuring for debt holders:

· Not all claimants will be included, other than senior creditors will get their interests and principals paid.

· Risks are created to claimants, especially if Horizon declares bankruptcy right after the restructuring. Since the Chapter 11 will start from the newly restructured claims, therefore, if debt holders agreed to accept the equity to payback their original debt claim, then the court will view this as claimants agreed to reduce its original claim, that mean the claimants will never get their money back if Horizon gone bankrupted.

Recommendation

Horizon Lines in Today

On 11th November, 2014, Horizon Lines, Inc. announced that it had the concluded agreement to sell the entire company, which Matson Inc. ,known as MATX in NYSE, will acquire the stock of Horizon, including its Alaska operations and the assumption of all non-Hawaii business liabilities. On the other hand, Horizon also announced that it has agreed to sell its Hawaii operations to The Pasha Group for $141.5 million and intends to shut down its Puerto Rico liner operations by the end of 2014 (Schwing, 2015).

Under the terms of the Transaction, Matson acquired Horizon for $0.72 per fully diluted common share, or $69.2 million, plus the repayment of debt outstanding at closing. The total value for the Transaction is $456.1 million, before transaction costs,, based on Horizon’s net debt outstanding as of September 21, 2014, less the anticipated proceeds from the Hawaii Business Sale (Matson, 2014).

Matt Cox – CEO of Matson said that the acquisition of Horizon’s Alaska operation helps Matson to grow Jones Act business and acts as a leader to serve their customers in the Pacific. The new CEO of Horizon in 2014 – Steve Rubin said that this transaction would provides value for their shareholders and uphold their financial commitments.

References

Bloomberg (n.d.). Bloomberg Business. Retrieved from: http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=4027729

IMF (2012) World Economic Outlook Database 2012. Retrieved from: https://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx

Matson (2014). Matson to acquire Horizon’s Alaska Operations. Retrieved from: http://investor.matson.com/releasedetail.cfm?ReleaseID=882239

PwC (2012). Global Shipping Benchmarking Analysis 2012: Navigating in stormy waters.

Schwing, E. (2015). With Matson acquisition final, Horizon Lines no longer exists. Retrieved from http://www.ktoo.org/2015/06/05/matson-acquisition-final-horizon-lines-no-longer-exists