Major bond-rating company predicts Harry & David defaults

Standard & Poor's Ratings Services has lowered Harry & David's corporate credit rating and suggested the Medford-based gourmet food and gift retailer will default on some debts or file for Chapter 11 protection.

"The outlook is negative," Standard & Poor's credit analyst Mariola Borysiak said in a report posted on the agency's website. "We believe that Harry & David's current capital structure is unsustainable and that the company will seek to restructure its balance sheet. In our opinion, this could lead to a selective default or a filing for protection under Chapter 11."

In an unsolicited rating, Standard & Poor's dropped Harry & David's rating to CC, defined as "highly vulnerable," from CCC, which is defined as vulnerable and dependent on favorable business conditions to meet its obligations. Ratings range from AAA at the top to D, for default.

The firm also lowered ratings on Harry & David's $175 million unsecured fixed-rate notes and $70 million senior floating-rate notes to C from CCC-.

"The ratings on Harry & David reflect its unsustainable capital structure and weak liquidity position, in our view," Borysiak wrote.

In a preliminary disclosure of the company's finances last week, Harry & David reported lower sales, a calendar-year loss of $57.6 million and reduced cash flow.

Harry & David's preliminary results for the second quarter ending Dec. 25 indicate that the company failed to meet credit-line covenants and because it didn't meet those requirements, it won't be able to borrow on its $105 million line, Standard & Poor's noted.

The covenants require Harry & David to repay its revolver balances to zero as of Dec. 26 of each year and maintain a minimum cash balance of $50 million as of Dec. 31 each year.

Standard & Poor's noted: "Although the company repaid all amounts outstanding under the revolving credit facility, it reported that at Dec. 25, its cash balances were $66.9 million and accounts payable $57.9 million. As such, we believe it will not be able to finance its operations without restructuring its debt obligations and securing new capital."

Moody's Investor Service, Fitch Ratings and S&P are the Big Three credit rating agencies. Generally companies desiring to sell bonds seek ratings from one of the three. During the financial meltdown of 2008, the ratings services were criticized for not being aggressive enough in reporting corporate financial difficulties.

— Greg Stiles

Share This Story