Fitch Affirms Kirby Corporation's IDR at 'BBB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Kirby Corporation (KEX) at 'BBB'. In addition, Fitch has affirmed the senior unsecured revolving credit facility and senior unsecured notes at 'BBB'. The Rating Outlook is Stable. Approximately $780 million of outstanding debt is covered by these ratings. A full rating list follows at the end of this release.
KEY RATING DRIVERS
The ratings are supported by the company's strong free cash flow (FCF), low leverage for the rating category, adequate financial flexibility, and strong market share in the marine transportation segment. Ratings also incorporate Fitch's expectation that Kirby will use FCF for capital deployment actions including acquisitions, capital expenditures, and share repurchases.
Kirby's credit profile benefits from considerable market share in the inland tank barge market, as the company operates approximately 23% of the industry's current capacity. The company has historically maintained significant FCF margins, typically in the high single-digits, though periodically depressed due to capex related to fleet deliveries. In addition, KEX's high EBITDA margins, north of 27% in 2015, and successful capacity management within the inland marine market, has allowed the firm to maintain financial flexibility and adequately mitigate the impact of cyclicality in the energy markets.
Fitch expects continued strategic acquisitions, largely funded through debt given current liquidity levels. Offsetting the risks of on-going acquisitions is KEX's track record of using FCF to repay acquisition-related debt and utilizing equity as part of the consideration offered in larger transactions.
Ratings concerns include the company's recent shift to shareholder-friendly cash deployment strategies. In 2015, the company repurchased $241 million of shares. KEX has authorization to repurchase an additional 1.4 million shares as of December 2015. Fitch is also concerned with the firm's limited cash balance and consistent use of its revolver. Additional concerns include a potentially large debt-funded acquisition or margin erosion due to pricing pressure in the inland marine transportation market.
Pricing power has remained relatively strong in the inland tank barge market through 2015 as most of the rate reductions have come in the form of lower fuel surcharges. Fitch expects further rate declines in 2016 despite industry-wide capacity utilization rates at roughly 90%. Approximately 80% of the company's marine transport business is under term contract, typically one year in duration, though these contracts are increasingly being rolled over in a soft spot rate market. Fitch notes that 47% of KEX's marine transportation revenue actually comes from servicing the petrochemical market and this proportion has been steady for several years. In 2015, only 30% of marine transportation revenue came from Black Oil deliveries, which includes among other products, crude oil, asphalt, coker feedstock and bunker fuel. An additional 20% of marine transportation revenue was generated from refined petroleum product deliveries in 2015.
Fitch expects capex to be approximately $240 million in 2016, down considerably from the $343 million deployed in 2015, which was higher than anticipated due to progress payments on KEX's new coastal units that were incurred in December, 2015, one month earlier than anticipated. Fitch views the firm's frequent asset purchases as interchangeable with its regular capex. Fitch expects KEX to continue regular fleet asset purchases to maintain the size and quality of the firm's fleet such as its recent $88 million purchase of assets from Seacor in March, 2016. Fitch expects KEX's FCF generation to remain strong and likely north of $150 million in 2016 driven by high operating margins and the lack of a dividend.
Kirby's adjusted leverage (total adjusted debt/EBITDAR) at Dec. 31, 2015 was 2.8x, compared to 2.5x at year-end 2014. Kirby typically maintains adjusted leverage in the 3.5x-2.5x range. Kirby incurs a lease expense for certain rented facilities, equipment, and towboats, which have charters that include crew costs, thereby inflating the company's rent expense. Fitch multiplies annual rent expense by 8x for its total adjusted debt amount.
--Significant revenue decline in 2016 driven by lower charter rates;
--EBITDA margins of approximately 25% over the medium term;
--Capex remains at roughly 13% of revenue annually;
--Lack of a common dividend over the medium term.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Adjusted leverage (total adjusted debt/EBITDAR) below 2.5x for a sustained period;
--FCF margins above 10% for a sustained period.
Negative: Future developments that may, individually, or collectively, lead to a negative rating action include:
--A significant debt-funded acquisition;
--A significant increase in leverage to fund a large share buyback or special dividend;
--Adjusted leverage (total adjusted debt/EBITDAR) above 3.5x for a sustained period.
As of Dec. 31, 2015, Kirby's total liquidity was $272 million composed of $6 million in cash on hand and $266 million in available funds under its revolver. The cash on hand, although fairly small, is in line with historical amounts as the company typically prefers to keep a small amount of cash on its balance sheet. In addition to its cash on hand, Kirby maintains liquidity through a $550 million unsecured revolver that expires in April 2020. As of Dec. 31, 2015, there was $279 million outstanding under the facility as well as $5 million in letters of credit. The borrowings under the revolver were used to finance capital expenditures, share repurchases, and to refinance the prior credit facility.
FULL LIST OF RATING ACTIONS
Fitch affirms KEX's ratings as follows:
--IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable.