Moody's could cut K-Sea

Moody's Investors Service said it placed K-Sea Transportation Partners LP's B1 corporate family rating on review for possible downgrade after the company announced that it would be buying Smith Maritime, Ltd. and Sirius Maritime LLC for a total of $205 million, $195 million of which will be initially funded with debt.

The issuer has a corporate family rating of B1. The speculative grade liquidity rating of SGL-3 is unchanged.

The outlook was previously negative.

The review will focus on the effect the consolidation of the two targets will have on K-Sea's credit profile with emphasis on K-Sea's long-term financing plans, Moody's said. Also under consideration are the expected impact of ongoing master limited partnership distributions and the multi-year fleet modernization program on cash flow generation.

"Notwithstanding the potential for interest coverage and leverage measures that could indicate a higher rating under potential long-term financing options, the expectation of significantly negative cash flow generation in upcoming periods due to the prioritization of returns to shareholders under the MLP structure might result in the rating being downgraded to B2," Jonathan Root, Moody's high-yield shipping analyst, said in a written statement.

An all long-term debt financing scenario could also result in a downgrade, the agency said. Debt-to-EBITDA would likely increase and EBIT-to-interest coverage would likely fall below 1.5 times from about 2.2 times at March 31. Cash flow generation also would likely remain weak due to the related higher interest burden, Moody's noted.

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