The bank debt, bonds and equity of Interstate Bakeries have all climbed since the company filed for Chapter 11 on Sept. 22. Interstate’s $290 million “A,” $120 million “B” and $99 million “C” loans are all trading in the 97-98 range, up from the 94-96 context last week. The company’s $300 million revolver traded up to the 98 1/2-99 1/2 range, up from the 96 level.
“The bank debt is back trading up almost to par, suggesting that senior creditors are quite confident that they'll get all their money back with accrued interest,” said Duncan Yin, a senior v.p. and principal with CRT Capital Group. Meanwhile, “In less than two days the bonds have traded at 77, then 85, then 90,” said Yin, who put a buy rating on the 6% convertible notes and stock after the company filed—a highly unusual call. “It’s just the changing sentiment on the name and the perhaps the report contributed to this.”
He believes that the most likely scenario is that the bank debt and bonds will be reinstated by the bankruptcy court when the reorganization plan is complete, with accrued interest to the debt and no dilution to the equity. The reasoning is that the underlying cash generating ability of the company has not materially deteriorated. “When Interstate finally solves the mystery of its new control system, it should be able to support its pre-petition capital structure,” Yin reported.
One concern some buyers may have though is the possibility of an accounting fraud. But Yin, said “this is a relatively straightforward business with an income statement marked by quick cash collections and a balance sheet without significant inventory or accruals. This offers fewer opportunities for a dishonest management team to create fraudulent financial statements,” he suggested.
Prior to filing, the baked goods company amended its revolver to restrict borrowing on the revolver to $255 million and increase pricing by 50 basis points (LMW, 9/20). The revolver is priced at LIBOR plus 3%, while the “A” and “C” tranches are priced at LIBOR plus 3 1/2%. The “B” loan has a coupon of LIBOR plus 3 3/4%. Scotia Capital, BNP Paribas, Rabobank, SunTrust Bank, Bank of America, J.P. Morgan, Bear Stearns--through 47th Street Funding, American Money Management Corp., Sankaty Advisors, CoBank, Comerica Bank, Eaton Vance Management, Farm Credit Services, Angelo Gordon & Co., Massachusetts Mutual Life, RBC Leveraged Capital, Babson Capital Management, UBS and U.S. Bank signed the amendment.