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Horizon Lines Inc Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 1323 | 769 Words (3 Pages) | Kenneth Eades, Daniel Hake | Darden School of Business : UV6617 |
A Word File
The Horizons Lines is currently surrounded by many complications particularly related to the operations of the company. Firstly, the economy is under severe pressure and the restriction imposed by the Jones Act is proving to have a negative influence on the operations of the company. The covenants that the company has signed are in sever danger as the earnings performance in 2010 is very poor and the criminal fine that was imposed on the company are also contributing towards company’s inability to meet those covenants.
Following questions are answered in this case study solution
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Does Horizon have an operating problem or a financial problem? Based on the projections given in case Exhibit 8, will Horizon default on its debt in 2011? That is, what interest coverage and leverage ratios do you estimate for 2011? Can Horizon become a viable company over the long term with the proper capital structure in place?
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Explain the pros and cons for each of the three financial restructuring options. Of the three options, which do you prefer and why? What are the major risks that accompany your decision and how would you mitigate them?
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If you were to go with the Option 1 (issuing equity), how many shares would you need to issue? Assume that Horizon wants to raise $100 million in addition to the existing $524 million in the current capital structure ($330 million of convertibles and $194 million of senior credit facility).
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Assuming that you had selected Option 3, how would you restructure the debt? Why would the current debt holders agree to your restructuring plan?
Case Analysis for Horizon Lines Inc
The legal settlements account for the major deductions in the operating earnings. The total cash and interest obligation which is projected for the year 2011 is $23,795 Million and the total earnings before interest and tax for the year is projected to be negative. This indicates a default in covenant as the interest coverage ratio is very low. Therefore, the financial problems of the company will increase in the future as interest and principal payment of the company of the company will be growing. After 2012, the operating earnings of the company is improving at a fast pace and the ratios will turn favorable when senior credit facility and a convertible senior note retire. As the business as high barriers to entry, the competition will be lower in the future and Horizons could become a viable option with a proper capital structure.
2. Explain the pros and cons for each of the three financial restructuring options. Of the three options, which do you prefer and why? What are the major risks that accompany your decision and how would you mitigate them?
i. Issue New Equity
The benefit of issuing new equity to the market will allow the company with quick financing. Bu doing this company do not need to pay periodic interest payments. Not adding debt to the company’s financial statement, management can lower the financial leverage of the company. The disadvantage is that the share of existing shareholders will be diluted after the new shares come in the market.
ii. File for Chapter 7
By declaring bankruptcy, the company can rebuild its credit and it will relieve many of the financial obligations. But at the same time business might has to lose the fixed assets which is not exempt from sale by the bankruptcy trustee. Moreover, the legal charges that would incur to explain the financial mess to the judge are enormous.
iii. Restructure the debt
A restructuring of debt can cause the company to negotiate for lower interest rates and rolling the past due loan payments into the new loan balance. The disadvantage includes that Horizon can not include any claimants other than the senior creditors. Moreover, the voluntary restructuring could create a risk for the claimants.
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