Fitch affirms Kirby BBB ratings applicable to US$250M unsecured revolving facility, US$200M senior unsecured notes, new US$540M senior unsecured term loan; outlook is stable

Lorena Madrigal

CHICAGO , March 16, 2011 (press release) – Fitch Ratings has affirmed the ratings of Kirby Corporation (KEX) following its announcement that KEX will acquire K-Sea Transportation Partners (K-Sea). The ratings have been affirmed as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Unsecured credit facility rating at 'BBB';

--Senior unsecured rating at 'BBB'.

KEX's ratings apply to a $250 million unsecured revolving credit facility, $200 million of senior unsecured notes and the new $540 million senior unsecured term loan. The Rating Outlook is Stable.

On March 13, 2011, Kirby announced that it planned to acquire K-Sea for approximately $600 million. The transaction will be financed with a new $540 million term loan and the issuance of Kirby common stock. K-Sea is an operator of tank barges and tugboats participating in the coastwise transportation of mostly refined petroleum products in the United States. The acquisition provides Kirby with an entry point to the coastwise transportation market, but offers few operational synergies with the company's existing inland waterway business. Kirby expects the transaction to close in either June or July 2011.

Kirby's acquisitive nature is the issue that has placed the most pressure on the company's ratings. The $540 million of incremental debt from the company's new term loan puts Kirby's pro forma credit metrics at the high end of the 'BBB' rating category. Fitch expects Kirby will now shift its focus toward acquisition integration and debt reduction over the next several quarters. However, Kirby's Rating Outlook could be revised to Negative in the event that market conditions worsen over the next 12 to 24 months or if the company undertakes another debt-funded acquisition that further weakens its credit profile for an extended period of time. Following the close of the K-Sea transaction, Kirby will have limited margin for error at the current rating level due to elevated lease-adjusted leverage. Fitch believes the financial success of the transaction is dependent on a recovery in K-Sea's business and a reversal of the negative cash flow over the past three years. Kirby will also have the task of concurrently integrating three acquisitions which may create additional challenges during 2011.

The planned acquisition is the largest in the company's history and represents a departure from Kirby's traditional growth strategy. While the incremental debt and associated pressure on Kirby's credit profile raise concern, the existing ratings have incorporated the prospect of sizable near-term acquisitions. As noted in the Sept. 10, 2010 release, Fitch believed the company could potentially undertake a transaction of $200 million or more at some point. However, Fitch is wary of the purchase multiple applied to a company with pressured EBITDA and several consecutive years of free cash outflows. Slightly offsetting Fitch's concern is the expectation that K-Sea's future cash flow generation will improve as the industry's pricing power strengthens from capacity reduction efforts and capital expenditures decline following a period of elevated tank barge deliveries.

Kirby ended 2010 with $196 million of cash and cash equivalents, a record for the company, and nearly full availability under the company's $250 million unsecured revolving credit facility. However, a material portion of available liquidity has been applied to the two acquisitions announced last month totaling approximately $320 million. In early February, Kirby announced that it would acquire the ship bunkering assets of Enterprise Marine Services for $53 million in cash. Later in the month, the company reached an agreement to acquire United Holdings for $270 million in cash (before post-closing adjustments) and an earn-out provision that could result in up to an additional $50 million payment in 2014. The acquisition will be funded with available cash and borrowings from the company's $250 million credit facility.

While the recent flurry of debt-funded transactions will pressure the current ratings, Kirby has a good track record of quickly repaying its acquisition borrowings, and Fitch believes the company likely will seek to repay any debt associated with these acquisitions quickly, as well. Fitch estimates that, pro forma for the transactions, lease-adjusted leverage at the end of 2011 will be in the mid 3 times (x) range, versus a year-end 2010 figure of 2.4x. In addition, Fitch expects the company will continue to produce positive free cash flow, as it has in recent years, which will allow it to steadily reduce its outstanding credit facility borrowings over the next several quarters.

Kirby's core business fundamentals and cash flow generation remain solid. Market conditions in the tank barge business improved during 2010, although pricing remains weak relative to recent historical levels, due, in part, to the effects of term contracts that were entered into during the depths of the recession. Capacity utilization was running in the 80%-85% range during 2010, which bodes well for the pricing environment going forward. Free cash flow in 2010 was $108 million after $137 million of capital expenditures. Fitch expects free cash flow to be positive again in 2011, despite an expected increase in capital spending. Following the amendment of its revolving credit facility in November 2010, which now comes due in late 2015, Kirby has no significant debt obligations until its $200 million in senior unsecured notes come due in February 2013.

Additional information is available at 'www.fitchratings.com'.

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