Another company downgrades Harry & David's credit rating

A second major credit-rating firm has downgraded Harry & David bonds and called the Medford-based gourmet food and gift retailer's financial outlook "negative."

Moody's Investor Services today downgraded Harry & David's probability of default and corporate family ratings to Ca, considered highly speculative with some chance of investors recovering principle and interest, from the more favorable Caa3. Moody's said Harry & David's senior unsecured notes were lowered to C, the company's lowest rating denoting little chance of debtors being repaid at all, from Ca.

Moody's said the downgrade reflects its view that "Harry & David will likely default on its debt obligations in the very near-term." The company recently announced that it will not be able to borrow on a revolving credit line — a critical source of operating liquidity — as a result of covenant violations. Additionally, Harry & David is facing an estimated $7 million interest payment on March 1 on its senior unsecured notes, and a substantial scheduled debt maturity in March 2012 when the company's $58 million senior unsecured notes mature, Moody's noted.

As of Dec. 25, Harry & David estimated that it had $66.9 million of cash and $57.9 million of accounts payable.

The Ca rating takes into account that any restructuring of Harry & David's debt could result in debt holders being unable to recover their investment given the company's negative cash flow and low tangible asset value relative to its outstanding debt.

Moody's said the negative rating outlook reflects the chance that Harry & David's ratings could be downgraded if the company defaults on March 1 bond payments or the company recapitalizes its debt obligations at less than par. Such recapitalization could be accomplished if bond holders agree to new terms, or if the company seeks bankruptcy protection. Beyond that, a ratings upgrade in the near term is unlikely given the unsustainable nature of the company's current debt capital structure.

Previously, Standard & Poor's Ratings Services lowered Harry & David's corporate credit rating and suggested it will default on some debts or file for Chapter 11 protection.

— Greg Stiles

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