Horizon Lines, Inc. faced operational difficulties including price fixing fines, high costs of complying with the Jones Act, and empty return trips under a partnership. It had high debt and liquidity issues. Restructuring options considered were issuing new equity, filing for Chapter 11 bankruptcy, or negotiating directly with noteholders. Filing for Chapter 11 provided protection but was costly and lengthy, while negotiating directly obtained needed agreement most efficiently and allowed the company to reduce debt and allocate capital elsewhere.

1. Presented By:
Cheung Shuk Ming
Wan Chi Kin
Ken Huang
Lin Yong Shun
Lai Ying Xie
Horizon Lines, Inc.

2. Contents
1
2
3
4
Company Overview
Restructuring Options Analysis
Conclusion
Operational Difficulty

3. Company Overview1Part
．Horizon Lines, Inc. was an
American domestic ocean
shipping and logistics company
．The company operating in the
Continental United States, Hawaii,
Alaska, and Puerto Rico.
．In 2014, Matson Inc. has
completed its previously
announced $469 million
acquisition of Horizon Lines.

4. Price Fixing
． In 2008, three Horizon executives & two Sea Star Line executives pled guilty.
． For nearly six years they colluded to fix prices, rig bids, & allocate customers.
． $45 million fine imposed to be paid within the next five years.
． Nearly 60 civil class-action lawsuits filed against them
$20 million legal settlements expense.
Operational Difficulty2Part Criminal & civil fines

5. Operational Difficulty2Part Jones Act
． Majority owned by a U.S. corp
． Crew must be a min of 75% U.S. citizens
． Creates a high barrier to entry & operating
advantage
． High construction, maintenance, &
operating costs
． Very few goods shipped back to the U.S.
． Returning ships traveling long distance with
empty containers
DEFINITION of 'The Jones Act'
． Legislation that regulates maritime commerce between U.S. cities.
． The act required that goods and passengers transported by water
between U.S. ports be done in U.S.-made ships, owned by U.S.
citizens and crewed by U.S. citizens.
PROS CONS

6. Operational Difficulty2Part The Maersk Partnership
GUAN
HAWAII
U.S.
ALASKA
Puerto Rico
Few goods
Maersk
HRZL
Maersk
SFL
exit in 2010
empty

7. Debt Structure2Part
．Financial Leverage Ratio
【Formula】
Debt Ratio =
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
．This shows how many assets
the company must sell in order
to pay off all its liabilities.
．0.5 is reasonable ratio ?
>> Debt Ratio

8. Debt Structure2Part
>> Debt to Equity Ratio
．Financial Leverage Ratio
【Formula】
Debt to Equity Ratio =
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
．Lack of performance might also be
the reason why the debt to equity is
extremely high.
．Higher debt to equity ratio can mean
that investors dont want to fund the
business operations because the
company isn’t performing well.

9. Debt Structure2Part
>> Current Ratio
．Liquidity Ratio
【Formula】
Current Ratio =
Current Assets
Current 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
．This is an measure of liquidity because
short-term liabilities are due within the
next year.
．Companies with larger current ratio will
more easily be able to pay off current
liabilities when they become due without
having to sell off fixed assets to pay for its
current liabilities.

10. Debt Structure2Part
．Liquidity Ratio
【Formula】
>> Quick Ratio
Quick Ratio
=
𝑇𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
The quick ratio measures a company’s ability
to meet its Short-term obligations with its
most liquid assets.

11. Issue New Equity
Option 1
PROS CONS
．Relatively Easy
．No negotiations
．Stock Price Low
．Large number of shares required
Restructuring Options Analysis3Part Issue New Equity

12. 2011 2012 2013 2014 2015 2016 After 2016
Total
Obligations
172,246 638,802 112,708 83,788 88,788 68,788 145,959
Contractual Obligations (in thousands of US dollars)
Corporate Yields B rating = 7.94%
Present Value of
Obligations
$1,132.06 million
Restructuring Options Analysis3Part Issue New Equity

13. Restructuring Options Analysis3Part Issue New Equity

14. Restructuring Options Analysis3Part Issue New Equity
Shares raised = 1132.06 million/1.62$
= 698.8 million shares
Shares outstanding before new equity = 30.764 million shares

15. Restructuring Options Analysis3Part Issue New Equity
Voting Right Dilution
100%
Voting right dilution = 30.764 million/(698.8+30.764) million
= 4%

16. Restructuring Options Analysis3Part File for Chapter 11
File for Chapter 11
Option 2
This chapter of the Bankruptcy Code generally provides for
reorganization, usually involving a corporation or partnership.
A chapter 11 debtor usually proposes a plan of reorganization
to keep its business alive and pay creditors over time. People
in business or individuals can also seek relief in chapter 11.

17. Restructuring Options Analysis3Part File for Chapter 11
Introduction of Chapter 11
POR (Plan of
reorganization)
Horizon Lines Inc.’s
Value
Approval of the
Court
CRAM DOWN
Debt Claimant
opposed the Plan
of reorganization

18. Restructuring Options Analysis3Part File for Chapter 11 (WACC)
WACC =
𝐸
𝑉
× 𝑅 𝑒 +
𝐷
𝑉
× 𝑅 𝑑 × (1 − 𝑇𝑐)
• D/E ratio = 19.76 : 1.0
• D1/V ratio = 7.415 / 20.76
• D2/V ratio = 11.99 / 20.76
• D3/V ratio = 0.351 / 20.76
• E/V ratio = 1 / 20.76
• Tax rate = 34%

19. Restructuring Options Analysis3Part File for Chapter 11 (Cost of Debt)
• Senior Credit Facility (D1) = 4.6%
• Convertible Notes Yield (D2) = 7.5%
• Capital lease (D3) = 8.34%
Cost of Debt

20. Restructuring Options Analysis3Part File for Chapter 11 (Cost of Equity)
E 𝑅𝑖 = 𝑅𝑓 + 𝛽𝑖 𝐸 𝑅 𝑀 − 𝑅𝑓
．Market Risk Premium = 5.6%
．Risk free rate = 3.17%
．Beta = 16.71 (Hamada equation)
．Cost of equity = 96.75%

21. Restructuring Options Analysis3Part File for Chapter 11 (WACC)
WACC = 8.69%

22. 2011E 2012E 2013E 2014E 2015E
Adjusted
EBITDA**
42,315 63,776 83,788 95,996 104,449
Market Value (Estimate) $ 321.522 million
WACC = 8.69%
Restructuring Options Analysis3Part File for Chapter 11 (Market Value)

23. X% DEBT
Y% EQUITY
Senior secured lender
Junior unsecured lender
Restructuring Options Analysis3Part File for Chapter 11
$ 321.522 million

24. Restructuring Options Analysis3Part File for Chapter 11
• Pros
• Restructure while continuing operations
• Protect company from being liquidate
• Continue to pay its suppliers and employees
• Cons
• Legal fees (4% of annual revenue, Accountant expenses, etc)
• Take a long period to resolve
• Possible loss of shareholder control

25. Conclusion4Part
Option 2 Option 3Option 1
．Declining Stock Price
．Causing many new problem
．Protection from the law
．Extremely high cost
．Time consuming
．Faster
．Lower cost
．Difficult to obtain all agreement
．More risk for noteholders

26. Conclusion4Part
More freedom to
allocate capital
Option 2 should be
our last resort
Saving money to do other
meaningful things

27. Conclusion4Part
Option 3
1. 99% noteholders signed the agreement
2. $228.4 million of debts are eliminated
3. Provide SFL with $40 million of Second
Lien Secured Notes plus warrents of 10%
of shares outstanding
4. Transfer 5 inactive vessels' $220.8
milliom lease obligations to SFL