CSX Lines Circles Domestic Market

CSX Lines' control over a large portion of the U.S. flag vessel market gives strength to the company's $200 million credit facility, which backs The Carlyle Group's acquisition of the ocean-liner operator from parent company CSX Corp. U.S. Flag vessels are ships owned, manned and built by the U.S. Under the Jones Act, only these vessels can transport cargo between U.S. ports. The limited competition allows CSX Lines to hold a 37% market share in its major trade routes from the mainland U.S. to Puerto Rico, Hawaii, Guam and Alaska, explained David Berge, a Moody's Investors Service analyst. The rating agency has assigned a Ba3 rating to the credit.

The rating is based on the expectation that cash flow from the CSX Lines will be sufficient to quickly repay the debt. While the company is expected to generate stable, sustainable revenue, margins will be thin due to the CSX Lines' operating leases. The company leases nine out of its 17 vessels as well as shore-side facilities and containers, noted Berge. Although the company's leverage ratio is estimated to be 2.5 times pro forma 2002 EBITDA, taking into account the high lease levels, the company has a leverage multiple of 4.2 times pro forma 2002 EBITDAR. The high lease levels similarly affect interest coverage. Whereas interest coverage is five times 2002 pro forma EBITDA, interest coverage plus rental payments is only 1.6 times.

There is only modest asset coverage on the new credit, with fixed assets making up $122 million of the company's approximately $480 million assets ($200 million of this amount comes from goodwill associated with The Carlyle Group). In a distressed sale environment, the vessels and other assets may not be able to bring in enough in proceeds to cover the senior debt, but the stable domestic shipping sector mitigates this concern. "It would be a concern if it were a very volatile, cyclical sector like international shipping," Berge said.

Standard & Poor's has given the new credit its corresponding BB- rating, citing the high leverage and capital intensive industry. The new credit comprises a $25 million revolver and a $175 million "B" term loan. CSX Lines will be renamed Horizon Lines upon the completion of the acquisition.