Fitch raises Flowers Foods to investment grade

Fitch Ratings upgraded Flowers Foods, Inc.'s senior secured bank revolver to BBB- from BB+ and removed the Rating Watch Positive. The outlook is stable. Fitch noted Flowers is currently negotiating a new unsecured revolver, which it expects to rate BBB-.

The upgrade follows the sale of Mrs. Smith's frozen dessert business to The Schwan Food Co., Fitch said.

Flowers received cash and retained net receivables totaling $240 million. Cash proceeds from the transaction were used primarily to repay debt including term loan A, term loan B, the GE Capital Lease, and certain other borrowings. As a result, total debt outstanding, at April 25, 2003 was not significant.

The sale is highly beneficial to Flowers' credit profile, Fitch said. In addition to the immediate decrease in leverage, seasonality and working capital requirements have also been reduced. Moreover, the divestiture should lead to greater cash flow stability.

While risk of significant debt financed acquisitions, share repurchases or large dividend payments will increase with the lifting of financial covenants associated with the bank facilities, Flowers' management is committed to maintaining credit statistics appropriate for its new rating level, Fitch said.

S&P puts Wackenhut on watch

Standard & Poor's put Wackenhut Corrections Corp. on CreditWatch with negative implications including its $125 million term B loan due 2008 and $50 million revolving credit facility due 2007 at BB.

S&P said the watch placement follows Wackenhut's announcement that it has entered into an agreement to repurchase all 12 million shares of its common stock held by Group 4 Falck A/S for about $132 million.

The transaction is expected to involve a restructuring of Wackenhut's existing senior secured credit facilities and the issuance of new debt.

S&P cuts Interstate Bakeries to junk

Standard & Poor's downgraded Interstate Bakeries Corp. to junk including cutting its $125 million term loan B due 2008, $300 million revolver and $375 million term loan A due 2007 to BB+ from BBB-. The outlook is negative.

S&P said the downgrade reflects Interstate Bakeries' weak operating performance and deteriorating credit measures following intense competitive pressures in its southeastern division and in their single-serve snack category. Moreover, rising health care costs and increased volatility in commodity prices have further compressed margins.

Mitigating factors are Interstate Bakeries' strong brand names in breads and snack cakes and its broad market penetration.

In this highly competitive industry, Interstate Bakeries is matched against several strong rivals (including Flowers Foods Inc., BBB-/Stable; Sara Lee Corp., A+/Stable and George Weston Ltd., A-/Stable).

However, the company's very broad distribution, serving markets that represent more than 90% of the U.S. population, could mitigate the impact of regional competition, S&P noted.

Distribution is a key factor in the baking industry, with Interstate Bakeries operating its own company-owned, direct-store distribution system (DSD). The company also sells products through a network of 1,375 thrift stores. Nevertheless, in the longer term, Interstate Bakeries will be challenged to reduce the high fixed-cost structure associated with its DSD system, reduce its relatively high employee compensation levels, and reduce its number of high-cost Thrift store outlets.

Interstate Bakeries' financial profile has become aggressive. For the fourth quarter ending May 30, 2003, Interstate Bakeries was required to seek amendments to the financial covenants on its secured revolving credit facility, S&P noted. The amendment was required following weak operating performance.

Rolling 12-month operating lease-adjusted total debt to EBITDA as of March 8, 2003, was 2.0x, while EBITDA to interest was flat at 5.2x for the period.

Moody's puts Reader's Digest on review

Moody's Investors Service put Reader's Digest Association, Inc.'s Baa3 senior secured credit facilities on review for possible downgrade.

Moody's said the review results from operating weakness in several of Reader's Digest's core businesses, notably its international businesses, and restructuring charges the company has taken in order to rationalize the cost structure.

As a result, the company will need to negotiate an amendment with its lenders under the facilities so as to not breach the debt-to-EBITDA ratio covenant, which will step down from 3.75x, including restructuring charges, down to 3.25x by June 30, 2003, Moody's added. While the company utilized $34 million of the $60 million of free cash flow it generated in the third quarter ending March 31 to reduce outstanding debt, debt-to-EBITDA for the third quarter was around 3.65x.

While the company anticipates paying down additional debt in the fourth quarter, Moody's believes it will be insufficient to remain in compliance with the step down in the leverage ratio covenant.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.