Standard & Poor's downgraded Vlasic Foods International's subordinated debt rating to DD from CC last week after the company announced it had filed for Chapter 11 bankruptcy. Kenneth Drucker, director in the corporate ratings group, said the downgrade was automatic on the heels of the announcement. He said ultimately the problem was the company had too much debt and too little income to offset it. "They weren't able to grow their business fast enough," he said. A spokesman for the Cherry Hill, N.J.-based company did not return calls for comment.
He explained that there were dynamics in the industry which led to the filing, such as consolidation in the retail environment as well as customer consolidation. "With consolidating, there was no pricing flexibility. The commodity cost of cucumbers is low, and it's hard to pass on the price increases." He added that the customer base is also consolidating. "It's very competitive, and there's a lot of private label competition," he said.
Also problematic for the company was the $483 million in debt it couldn't pull out from under. The company had missed its Jan. 2 interest payment on the subordinated debt. Although Vlasic obtained an amendment and covenant waivers on its senior credit facility through Feb. 28, the amendment required the company to fund an escrow account with sufficient proceeds to meet the January interest payment. This account had to have been established by the end of last year.
Supporting the rating is the sale of Vlasic to the Heinz Corp. for nearly $200 million, also announced last week. "This recognized some brand equity," Drucker said. "Anybody bidding for them knew there were severe financial constraints. In order to sell they had to organize into bankruptcy so the buyer didn't assume the liability."