Fitch Affirms Kirby Corp. IDR at 'BBB'; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed ratings of Kirby Corp. (NYSE: KEX) as follows:

--Issuer default rating (IDR) at 'BBB';

--Senior unsecured rating at 'BBB';

--Unsecured credit facility rating at 'BBB'.

The senior unsecured rating applies to $200 million in senior unsecured notes. The Rating Outlook is Stable.

Kirby's ratings reflect the inland tank barge operator's continued solid performance amidst a backdrop of strong industry fundamentals. Despite a slowdown in shipping demand in other sectors of the U.S. economy, demand for petrochemical and black oil shipments on the U.S. inland waterway system remains very strong, and Kirby has virtually 100% of its fleet fully utilized. Despite modest growth in the tank barge industry fleet, market fundamentals are expected to remain good over the near- to medium-term, as many of the new barges to be delivered over the next several years will serve as replacements for retired barges. As a result, Fitch expects Kirby to experience continued margin strength as industry demand and pricing remain favorable.

Over the past several years, the Diesel Engine Services segment has become an increasingly significant component of Kirby's consolidated business, as the company has made several high-profile acquisitions in the segment, including its June 2006 acquisition of Global Power Holding Company. Kirby's announcement on July 9 that it plans to acquire Saunders Engine and Equipment Company, Inc. for $13 million highlights the company's continued focus on growing this line of business. In the first quarter, Diesel Engine Services was responsible for 24% of Kirby's consolidated revenue and 17% of its consolidated EBITDA, up from 16% and 11%, respectively, in the first quarter of 2006. The year-over-year increase in Diesel Engine Services' contribution to Kirby's financial results was due largely to the Global acquisition. The increased prominence of Diesel Engine Services within Kirby's business mix has put some pressure on consolidated margins, however, as that business has recently generated lower margins than the Marine Transportation segment. (Diesel Engine Services' first- quarter EBITDA margin was 17% versus a 27% EBITDA margin in Marine Transportation.) The Global acquisition was also a contributor (along with increased capital expenditures and other, smaller acquisitions) to the increase in Kirby's debt load, which was $361 million on March 31, 2007, versus $201 million at March 31, 2006.

Although Kirby tends to keep a relatively small amount of cash on its balance sheet, ending the first quarter with only $2.8 million in cash and equivalents, liquidity remains good. Net cash from operations is expected to remain strong over the near term and should be sufficient to cover the company's capital expenditure needs. In addition, following the Global acquisition last year, Kirby increased the size of its revolving credit facility to $250 million and included an accordion feature that could raise the commitment level to as much as $325 million with lender approval. As of March 31, $92 million was available under the revolving credit facility after accounting for drawn amounts and outstanding letters of credit (LOCs). Revolver availability could increase over the course of 2007 as the company pays down borrowings that were used to temporarily fund large first-quarter capital expenditures, as quarterly capital expenditures are expected to be lower for the remainder of the year. However, the repayment of borrowings may be limited by acquisition spending. Cash obligations tied to debt maturities are minimal through 2010, with $1 million or less due annually until the revolver borrowings come due in 2011.

Kirby's credit metrics have remained relatively unchanged over the past year. As of March 31, lease-adjusted leverage (lease-adjusted debt/EBITDAR) was 3.3 times (x), down slightly from 3.4x at March 31, 2006. Over the same period, EBITDAR fixed-charge coverage (EBITDAR/gross interest expense plus rent) increased slightly to 3.1x from 3x. Barring a large acquisition, both metrics are expected to show modest improvement over the course of 2007, as outstanding revolver borrowings decline.

Aside from the cyclical nature of the tank barge industry, the greatest concern is Kirby's penchant for making acquisitions. Although Kirby has a good track record of integrating its acquisitions in both the Marine Transportation and Diesel Engine Services segments, any decline in near-term leverage could be reversed if the company borrows to fund a large acquisition, as it did last year when it acquired Global. However, Kirby historically has used the increased free cash flow from its acquisitions to pay down those borrowings relatively quickly. In terms of industry cyclicality, concerns are mitigated by the tight supply of tank barges that will likely continue for several more years. As a result, a modest decline in demand for the products shipped by Kirby could actually be a slight positive for the company, as it would likely serve to better match demand with available capacity, allowing for improved service levels and continued pricing strength.

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.