Investing.com -- Moody’s Ratings has upgraded the credit rating of Kirby (NYSE: KEX ) Corporation, a prominent player in the domestic liquid tank barge industry, from Baa3 to Baa2. The outlook has been revised from positive to stable. The rating of the company’s senior unsecured notes has also been upgraded to Baa2 from Baa3.
The upgrade is a reflection of Moody’s expectation that Kirby will sustain the significant improvement in its credit metrics, achieved through operational enhancements and debt repayment. This is despite the looming macroeconomic uncertainty. The company’s strong market presence in inland tank barge markets and heavy engine services for marine and on-highway transport sectors is a contributing factor to this expectation.
A lack of barge capacity in the sector for the coming years will keep utilization rates high. This will enable Kirby to secure higher contract rates during that period, helping the company to maintain a debt-to-EBITDA ratio below 2.0x.
Kirby’s credit profile is bolstered by its key role in the supply chains of its customers, particularly within the petrochemicals sector, which accounts for up to 30% of Kirby’s revenue. The company is currently experiencing an upturn in its core marine shipping markets, which is expected to continue. This is due to limited industry capacity to meet demand and improving spot pricing through 2025.
The U.S. Jones Act, which restricts competition for barge transport to domestic operators, provides Kirby with an additional advantage. It’s anticipated that Kirby’s EBITDA margin will improve to approximately 23% in 2025, thanks to higher pricing for renewing contracts.
Despite potentially challenging business conditions that could lead to reduced freight volumes from some customers, Kirby is expected to maintain conservative credit metrics. The company will likely continue to grow through acquisitions, with metrics temporarily weakening following significant transactions. However, debt repayment is expected to be prioritized after large acquisitions to restore credit metrics to within its financial policy targets.
Kirby’s liquidity is strong, with cash balances and short-term investments anticipated to be maintained between $60 million and $80 million. It is expected that the company will use free cash flow primarily for mergers and acquisitions and debt repayment before using excess cash flow for share buybacks. Kirby also has full availability under its $500 million revolving credit facility that expires in 2027. The company’s next debt maturity is in 2027 when its 5-year term loan with approximately $70 million outstanding is due. It is expected that the company will reduce the outstanding amount before maturity.
The stable outlook signifies Moody’s confidence that Kirby will manage its capital structure in accordance with its financial policy goals, including a target leverage no greater than 2x, while scaling back mergers and acquisitions and share buyback activities to mitigate any economic softness in its end markets.
The company’s rating could be upgraded if it can grow EBIT margin to above 20% while growing its other service lines, including power generation offerings in its distribution and services business. However, the rating could be downgraded if the EBIT margin approaches 10% or if there is a decline in liquidity. An aggressive financial policy, including increasing shareholder distributions or acquisitions that result in debt-to-EBITDA above 2.5x, could also lead to a rating downgrade.
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