Horizon Lines Executive Summary

Horizon Lines, Inc. is in deep financial trouble. They took on an amount of debt that was far greater than what they could manage with current income and even their projections. There are three options the firm may pursue; issue new equity, file for chapter 11 bankruptcy, or restructure the debt directly. Based on financial projections and estimates it is in the best interest of the firm to file for chapter 11 bankruptcy. Issuing new equity is not a feasible option because of the immense amount of shares that need to be issued. Not only would this diminish the stocks value (by diluting it) but investors would have a hard time holding/buying into the stock at such a dismal price. If Horizon were able to issue the correct amount of shares, earnings per share,price to earnings ratios, and return on equity would decline dramatically. Although this option is relatively easy and requires no negotiations, issuing new equity is not a viable option for Horizon Lines.

The option to restructure through debt is also not possible. Although it would save the company court costs and time if an agreement with senior debt holders are met, there are many drawbacks to this option. Without involving the courts, Horizon will find it difficult to work with junior claimants, because they would not be interested in striking a deal due to the fact they would not be first in line if the restructuring plan does not work. In addition to raising private debt, in order to grow the Jones Act business, new capital would also need to be raised. This could require the need to issue shares to the public which would be very difficult to conduct. By working directly with creditors, these creditors are going to require risk compensation through lending at interest rates as large as 10% to 15% on newly issued loans. This will be very difficult for Horizon to payoff and this large interest expense will damper the benefits that come from operations if the company were to succeed in the future.

The court...