Moody's Investors Service placed the Ba2-rated bank debt of Interstate Bakeries on review for a possible downgrade following the company's weaker than expected earnings and sales in its second fiscal quarter. Compared to the second quarter of last year, net sales for the company slipped 1.1% from the previous year and earnings per diluted share clocked in ten cents lower. "The key thing that we are faced with is growing the top line," said Paul Yarick, senior v.p., finance and treasurer of Interstate Bakeries. The company is addressing reducing its costs and improving its top line in order to improve its position, he added.
Interstate Bakeries has been pursuing a cost reduction program called SOAR, which is an acronym for Systems Optimization And Re-engineering. This program is an effort to rationalize investment in production, distribution and administrative focus and the Moody's review will take into account its progress. Moody's will also examine Interstate Bakeries' strategies for maintaining financial flexibility and navigating already tight covenant cushions. Finally, Moody's will consider Interstate Bakeries' ability to renew profitability and revive credit metrics to levels appropriate with its current rating.
The company has $732 million in bank debt that is affected by the review. This includes a $300 million revolver, a $309 million "A" tranche and a $123 million "B" piece, all of which is senior secured. The loans are cross guaranteed by Interstate Bakeries Corp., Interstate Brands Corp., and Interstate Brands West Corp.
* Standard & Poor's lowered the corporate credit rating on FirstEnergy Corp. to BBB- from BBB following a reassessment of the company's business risk profile. S&P has concluded that with a combination of operational and management challenges, FirstEnergy will not be able to improve its financials significantly enough to support its BBB rating.