Harry & David ratings take hit

Harry & David lurched closer to a day of reckoning after two bond-rating agencies downgraded the Medford-based gourmet food-and-gift retailer's credit ratings.

Responding to Harry & David's preliminary disclosure of weak holiday-quarter sales, a calendar-year loss of $57.6 million and reduced cash flow, both Standard & Poor's and Moody's have downgraded the company's bonds.

The company is faced with $7 million in interest payments due on $245 million notes on March 1. Because of its weak financial position, Harry & David said last week that it is out of compliance with its lender and likely would not have access to a $105 million credit line that could have been used to make the payment.

Along with detailing some of its financial issues last week, Harry & David announced it had hired the services of legal and financial firms that specialize in bankruptcies.

That sets the stage for a possible showdown with bondholders, who could see the value of their notes diminish should the company seek court protection.

The Rogue Valley's largest employer and most widely known name nationally has been fighting to stem the financial downturn that accompanied the national recession.

Harry & David employed about 4,600 salaried and hourly permanent employees nationally at Labor Day and had anticipated doubling that number over the Christmas holiday season. But sales came in 2 percent below the previous year's disappointing figures.

In its report, Standard & Poor's suggested Harry & David may 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," Borysiak wrote.

In its unsolicited rating, Standard & Poor's reduced 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. Standard & Poor's ratings range from AAA at the top to D, for default.

The firm also lowered ratings on Harry & David's unsecured fixed-rate notes and 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.

Standard & Poor's noted that the company's cash balances were $66.9 million and accounts payable $57.9 million.

"As such," the report said, "we believe it will not be able to finance its operations without restructuring its debt obligations and securing new capital."

Moody's Investor Services Tuesday 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 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.

Wasserstein & Co., along with Highfields Capital Management, acquired the company from Yamanouchi Consumer in 2004 for $252.9 million. The private equity firm, led by Bruce Wasserstein until he passed away in the fall of 2009, quickly recouped much of its investment and saddled the company with its present debt in February 2005 when it issued the bonds.

An attempt to take the company public in August 2005 went nowhere when the national economy began to slow and the initial public offering was withdrawn in May of 2008.

After a series of revenue declines, Wasserstein & Co. board member Steve Heyer replaced veteran Bill Williams as chief executive officer in February 2010.

Reach reporter Greg Stiles at 541-776-4463 or e-mail business@mailtribune.com.

Share This Story