Distressed debt investors are homing in on Interstate Bakeries bank debt and some lenders have already started to sell off exposure. Interstate's $290 million "A" loan and $300 million revolver changed hands in the 90-92 context, with estimates of approximately $20 million trading during the week. "The vultures are circling, they'd like to get in," one trader said. An Interstate spokesman and Paul Yarick, treasurer and senior v.p. of finance, did not return calls.
Interstate's loans dropped from the 97 3/4-98 1/4 context to the 94-95 range, while the revolver was seen quoted in the 90-92 context down from the 94-95 level after the company missed an extension to file financial results for 2004 and announced the hiring of restructuring firm Alvarez & Marsal to assist on accounting issues. "People see value in the mid-80s to low 90s context," a trader said. Banks that do not want to hold their exposure to the name will try to clean up their positions pushing down the market, he noted.
Some institutional investors that are holding the paper in collateralized loan obligations may also have to sell the name because of restrictions on holding CCC credits, a buyside trader said. Moody's Investors Service cut Interstate's bank debt rating from B2 to Caa1 because of the filing delay. Five months ago Standard & Poor's downgraded the ratings to CCC+ from B+.
The filing delay was attributed to deficient information on performance due to new financial reporting systems and uncertainties regarding anticipated financial results, according to a company release. Interstate could default on its bank debt if the company does not file its 10-K by the end of this month. Missing the September deadline could result in the loss of the ability to borrow further under its senior credit facility and accelerate the repayment of its outstanding debt, the release adds. Interstate's liquidity is dependent on filing its 10-K or obtaining waivers under its bank facility, said Moody's.
"If the company does file the debt will go to the mid-80s, which would be the ultimate downside value," a trader said. However, some market participants still see enough value in the company to cover all the bank debt without going through Chapter 11. But even if the company is forced to file for bankruptcy, some market participants believe the bank debt will still recover to the 90s range. "There are brand names behind it and people love brands," a buysider said.
Interstate's senior debt also consists of a $122 million "B" loan and a $99 million "C" piece. The bank deal is led by J.P. Morgan. Bank of America is syndication agent and other lenders include The Bank of Nova Scotia, BNP Paribas, Rabobank International, SunTrust Bank and Harris Trust and Savings Bank. Ag First Farm Credit Bank, Allstate Life Insurance Company, Banco Espirito Santo, The Bank Of East Asia, Bank Of Montreal, Eaton Vance Management, Deerfield Capital Management, Calyon, Chinatrust Commercial Bank, Cobank, Comerica Bank, Commerce Bank, Farm Credit Services Of America, Franklin Templeton Investments, IKB Capital, Aladdin Asset Management, Babson & Co., Mountain Capital, National Bank Of Kuwait, PB Capital, Sankaty Advisors, RBC Leveraged Capital, Stanfield Capital Partners, The Sumitomo Trust & Banking Co., UMB Bank and Van Kampen Investments are also cited as lenders to the credit that signed a recent amendment.