Horizon Inc. Case

This case is about financial difficulties and restricting of Horizon Lines INC., the largest U.S. domestic ocean carrier. Problems Horizon run into starting from the crime related to price fixing in Puerto Rico in 2008. Such litigation caused a fine of 45 million to be paid over five years since 2011. In addition, nearly 60 civil class-action lawsuits were filed against Horizon, which adds to the pressure of obligation. On the other hand, under severe economy downturn, operation restrictions imposed by the Jones Act start to have negative impacts on Horizon's operation. The Jones Act is to support the U.S. maritime industry by requiring that all goods transported by water between U.S. ports be carried on ships constructed and flagged in the United States. Such protection created both advantages and disadvantages for companies like Horizon. To alleviate the problem of imbalance in container utilization, Horizon entered into a strategic alliance with A.P. Moller-Maersk in 1990s to share container space along the Hawaii and Guam lane. However, under the pressure of economic downturn since 2008, Horizon's profitability fell. Maersk's unilaterally exit the strategic alliance in 2010 made Horizon locked into this long-term lease until 2018-19. Not only the termination of partnership left Horizon huge amount of leasing cost, the dropping freight rates and increasing fuel cost finally led to closing down unprofitable routes and holding non-Jones Act vessels pier-side. Even though the results didn't come favorably, such decision avoids further possible operation losses.

Compared with operation issues mentioned above, Horizon's financial problems are more serious and partially related to its operation issues. The poor earnings performance in 2010 and criminal fine made it hard to satisfy the covenant in 2011. The debt covenant for Horizon involves a maximum leverage ratio and minimum interest coverage ratio.

Refer to Appendix 1, the calculation indicates a default in covenant because of the low value of interest coverage ratio. As a result, future interest and principal payments would be accelerating and increasing stain on ability to meet its cash obligation, which adds to Horizon's financial problems.

In a word, financial issues are bigger problem for the company. Beyond 2012, with the end of Senior Credit Facility and convertible senior note, ratios turn to be favorable as projected and the projected EBIT before legal settlement reflects great growth since 2013. Given the nature of the business and high barrier of entry, from my point of view, Horizon is very likely to become viable with proper capital structure in the future.

To restructure its capital structure, Horizon has three options. The first option is to issue new shares of common stock. It is an easy and fast way to inject capital, however, existing shareholders will face voting right dilution. For example, refer to the latest stock prices, if the issue price is as high as 1.62 in 29th March 2011, Horizon has to issue 385 millions of share to raise planned amount of capital of 642 million, which will account for 91.77% of total equity. Please refer to Appendix 2 for more details. The second drawback of raising capital only through share is that with significant increase in number of share, multiples such as EPS will decrease. On the other hand, transaction cost can