Interstate Bakeries could default on its loans next month if operating results do not improve and the company is unable to meet the leverage covenants of its credit agreement. "Our performance hasn't lived up to what we expected, because of the lack of sales growth and decline in sales of 2.5% in the third quarter. Therefore our results ended in a loss," said Paul Yarick, treasurer and senior v.p. of finance at Interstate. "We are currently in discussion with our financial advisors [and] our lenders to resolve the situation before the end of fiscal year 2004."
Interstate's senior debt consists of a $300 million revolver, $291 million "A" term loan, $122 million "B" piece and $99 million "C" loan led by J.P. Morgan. Roughly another 25 banks and institutions are also participants in the deal. Interstate will seek an amendment on the credit agreement and needs the approval of 51% of its lenders, said Yarick.
Standard & Poor's noted that Interstate's EBITDA interest coverage covenant will increase to four times and total debt-to-EBITDA requirement will be adjusted to 3.25 times next May. Last month, the company's interest coverage was 3.1 times and total debt-to-EBITDA was approximately 3.9 times. Due to increased production costs and continued volume and price pressures, S&P expects credit measures to weaken further.