Overview
— We expect Houston-based marine transportation company Kirby Corp. to
gradually improve its financial profile, benefiting from debt paydown, strong
contract coverage, and increased earnings and cash flow from acquisitions made
last year.
— 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 April 26, 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. We expect the company to use a portion of its cash to pay
down debt, including the $540 million term loan it obtained during 2011,
mainly to finance the acquisition of K-Sea, a coastal liquid barge
transportation company. Still, we assume Kirby will make modest acquisitions
periodically to bolster operations. This limits upside potential to Kirby’s
rating in our analysis.
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. In 2011, 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). We expect the
company to keep a similar distribution during 2012. Exposure to moderate
cyclical demand swings in certain markets, ongoing investment and acquisition
activity, 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. The recent acquisitions increased the
transportation segment’s service offerings and geographical diversity.
Following the acquisition of K-Sea 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 Enterprise Marine expanded operations into transportation and
delivery services for ship bunkers (engine fuel). With the 2011 acquisition of
United Holdings, the engine services business expanded into land-based diesel
engine manufacturing and services businesses.
Kirby’s active fleet consists of 806 inland tank barges supported by 242
towing vessels and 59 coastal tank barges supported by 65 tugboats. 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. 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. Kirby faces competition from other
modes of freight transportation, including railroad tank cars, which are less
cost-effective but a faster mode of transportation.
As of Dec. 31, 2011, adjusted funds from operations (FFO) to debt was 43% and
debt to capital was 42%, lower than historical ratios but still 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 sized acquisitions, we still expect credit
measures to improve over the next year with FFO to debt approaching 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 moderate unrestricted cash and moderate availability under the unrated
$250 million revolving credit facility. The revolving credit facility allows
for an increase in the commitments of the banks to a maximum of $325 million,
subject to the consent of each bank that elects to participate in the
increased commitment.
We expect Kirby to generate sufficient cash flow for working capital purposes.
We assumed the high end of the company’s stated capital spending range of $265
million-$275 million primarily for fleet replacement and periodic dry-docking
expenses. We also assumed moderate-size acquisitions during 2012. As a result,
we expect moderate drawdown under 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 remain less than 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 And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Ratings Affirmed
Kirby Corp.
Corporate credit rating A-/Stable/–
