Fitch Affirms Kirby Corporation's IDR at 'BBB'; Outlook Stable

--Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured rating at 'BBB';

--Unsecured credit facility rating at 'BBB'.

Fitch's ratings apply to $200 million in senior unsecured notes and a $250 million senior unsecured revolving credit facility. The Rating Outlook is Stable.

Kirby's ratings reflect the marine transportation company's continued financial flexibility, strong liquidity and positive free cash flow despite materially weakened industry conditions over the past year. Although the recent decline in demand has eroded industry pricing, Fitch expects the pricing environment to improve gradually as demand stabilizes, the stream of new tank barge deliveries slows and the pace of barge retirements accelerates. This expected stabilization of demand and Kirby's significantly reduced capital spending plans in 2010 are expected to drive a significant increase in the company's free cash flow next year. However, Kirby's ever-present search for attractive acquisition opportunities, which could ramp-up if market conditions remain weak, continues to put some downward pressure on the IDR, effectively capping it at the 'BBB' level.

Late in the third quarter of last year, tank barge market conditions deteriorated rapidly as damage from Hurricane Ike resulted in the shutdown of a number of petrochemical and refining facilities along the Texas Gulf Coast. In the aftermath of the hurricane, the recession-induced decline in demand for the products produced by those facilities led many of Kirby's customers to keep these facilities offline or operating at a reduced capacity well into 2009. This ongoing decline in tank barge demand has led to a reduction in Kirby's barge utilization, which averaged about 80% to 85% in the second quarter of this year versus utilization levels typically in the 90% to 95% range before the fall off in demand last year.

This drop in utilization has been seen throughout the tank barge industry, leading to an unfavorable capacity situation and reduced pricing power. Rates on term contracts renegotiated by Kirby in the second quarter of this year ranged from flat to down 8% versus the same period last year, while industry spot rates were down about 10% to 15% (however, about half of this decline was due to lower diesel fuel prices). Although inflation escalators in Kirby's multi-year contracts led to a 4% to 5% increase in those rates at the beginning of the year, the combination of lower utilization, generally weaker pricing and reduced diesel fuel pass-through revenue led to a 23% decline in marine transportation revenue in the second quarter. Kirby's diesel engine services business has also felt the effects of reduced demand, as a decline in parts sales and mechanic services reduced revenue in that segment by 17%, as well.

Despite the revenue decline, Kirby's flexible cost structure (and, to a lesser extent, the decline in fuel costs) has allowed the company to maintain its strong margins. In the second quarter, Kirby's EBITDA margin increased by 320 basis points to 29.4% versus 26.2% in the year-earlier period, cushioning the effect of the decline in revenue on the company's operating cash flow. Much of this expense flexibility can be attributed to the company's significant use of charted towboats to meet a portion of its horsepower needs. In the quarter ended June 30, 2009, Kirby's active towboat fleet averaged 219 vessels, down from an average of 259 vessels in the second quarter of last year, with the fleet in the current quarter including 30 fewer charters than last year. Despite the removal of these chartered boats, Kirby continued to operate an average of 54 chartered vessels in the second quarter of this year, providing the company with additional flexibility to trim its towboat fleet further if market conditions warrant.

Kirby's liquidity remains strong, with $239 million in availability on its unsecured revolving credit facility at June 30, 2009. In addition, Kirby continues to produce significant free cash flow despite very heavy capital spending tied to new equipment deliveries this year. In the first half of 2009, Kirby's free cash flow totaled $35 million after $117 million in capital expenditures. In 2010, Fitch expects Kirby's free cash flow to rise significantly from this year's level as the company is expected to cut its capital spending markedly. Expected deliveries of new equipment in 2010 include only three tank barges and two towboats, down from 46 tank barges and five towboats expected to be delivered this year. With the reduction in new equipment deliveries, Fitch estimates that capital spending next year will fall by over $100 million compared to this year's record capital spending forecast of $180 million to $190 million. Depending on industry conditions, capital spending could remain relatively low for several years beyond 2010, as well, since Kirby likely will refrain from placing any large tank barge or towboat orders until market conditions improve enough to justify the investment.

With no significant debt obligations until June 2011, when its credit facility comes due, Fitch expects Kirby to use its free cash flow over the intermediate term primarily for acquisitions or share repurchases. The company could also consider instituting a dividend, which would lower free cash flow, although thus far it has preferred to avoid paying dividends in order to provide more cash to invest in the business. The company's share repurchase authorization has 1.4 million remaining, which would equal about $50 million at current share prices, but Kirby has tended to repurchase shares infrequently and only when management felt the company's stock was undervalued. Therefore, Fitch expects management to focus most heavily on acquisition opportunities, especially since the number of attractively priced acquisition candidates could grow if industry fundamentals remain weak for a multi-year period. Potential acquisitions targets could be in both the marine transportation and diesel engine services segments, and, although it is likely most transactions would be relatively small, Fitch does not rule out the possibility that the company could undertake a large, debt-financed acquisition, as well.

It is Kirby's acquisitive nature that continues to place the most downward pressure on its IDR and is the primary factor limiting the potential for an upgrade in the rating over the longer term. As such, Fitch does not foresee revising Kirby's Rating Outlook to Positive in the near term. On the other hand, Kirby's Rating Outlook could be revised to Negative in the event that market conditions worsen materially over the next 12 to 24 months or if the company undertakes a very large, debt-financed acquisition that leads to a substantial weakening of its credit profile for a prolonged period.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

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