June 12, 2009
Horizon Lines agrees class action suit settlement
Horizon Lines, Inc. (NYSE:HRZ) today reported that it has entered into a settlement agreement with the plaintiffs in the Puerto Rico class action antitrust litigation, and also entered into a credit agreement amendment with its lender group.
Puerto Rico Class Action Settlement Agreement
As previously reported, several purported class action lawsuits were filed against Horizon Lines and other domestic shipping carriers on behalf of a class of individuals and entities who purchased domestic ocean shipping services from various domestic ocean carriers in the Puerto Rico tradelane between 2002 and 2008. Those lawsuits were consolidated into a single multidistrict litigation proceeding in the United States District Court for the District of Puerto Rico. The complaints allege price-fixing in violation of the Sherman Act and Puerto Rican antitrust laws and seek treble monetary damages, costs, attorneys' fees, and an injunction against the allegedly unlawful conduct.
On June 11, 2009, Horizon Lines entered into a settlement agreement with the plaintiffs in the Puerto Rico class action antitrust litigation. Under the settlement agreement, which is subject to Court approval, Horizon has agreed to pay $20 million and to certain base-rate freezes, to resolve claims for alleged antitrust violations in the Puerto Rico tradelane.
The payment terms would require Horizon Lines to pay the $20 million into an escrow account while the base-rate freeze component of the settlement provides that class members with contracts in the Puerto Rico trade with Horizon Lines as of the effective date of the settlement would have the option, in lieu of receiving cash, to have their "base rates" frozen for a period of two years. The base-rate freeze would run for two years from the expiration of the contract in effect on the effective date of the settlement. All class members would be eligible to share in the $20 million cash component, but only contract customers of Horizon Lines would be eligible to elect the base-rate freeze in lieu of receiving cash.
As previously reported, Horizon Lines received a grand jury subpoena and search warrant from the U.S. District Court for the Middle District of Florida seeking information regarding an investigation by the Antitrust Division of the U.S. Department of Justice into possible antitrust violations in the domestic ocean shipping business, including Puerto Rico. Horizon Lines is cooperating with the Antitrust Division in that investigation. Also, several class action lawsuits relating to ocean shipping services in the Hawaii and Guam tradelanes and the Alaska tradelane have been filed against Horizon Lines. Horizon Lines intends to vigorously defend itself against those purported class action lawsuits.
Credit Agreement Amendment
Horizon Lines also reached an agreement with its lenders to amend the existing credit agreement in conjunction with the Puerto Rico settlement. The agreement will amend the definition of Consolidated EBITDA byadding certain charges related to the Puerto Rico settlement back to to the calculation of Consolidated EBITDA, andadding certain charges for litigation expenses related to antitrust litigation matters in an amount not to exceed $25 million in the aggregate and $15 million over a 12-month period back to the calculation of Consolidated EBITDA.
The definition of Consolidated EBITDA is used to determine whether Horizon Lines is in compliance with its secured leverage ratio and interest coverage ratio, as well as its ability to make certain restricted payments.
Horizon Lines has agreed to provide the following economic and structural changes for the benefit of the lenders: increase loan and letter of credit pricing by 150 bps and an increase in the commitment fee; a reduction in the size of the revolving facility from $250 million to $225 million; elimination of $150 million incremental facility; an amendment to the definition of Consolidated EBITDA that clarifies "non-recurring charges"; and other structural enhancements, including a step-down in the secured leverage ratio and further limitations on the ability to make certain restricted payments.
In addition, Horizon Lines has agreed to pay consent fees of $1.8 million.
"We appreciate the support of our lender group in the amendment process that provided the clarity and flexibility necessary to effect this settlement," said Mike Avara, Senior Vice President and Chief Financial Officer. "Although the cost of debt on both our $150 million revolver balance and $115.6 million term loan outstanding as of June 11th has increased by 1.50%, our revised blended total cost of debt remains fairly low at 4.47%, up from the previous 3.81%. The 4.25% interest rate on our convertible notes remains unchanged. We have worked closely with our banks and expect to remain in compliance with our financial covenants."