Moody's revises Krispy Kreme rating to negative
September 14, 2007
by Jeff Gelski
NEW YORK — Moody’s Investors Service on Sept. 13 lowered the Speculative Grade Liquidity rating for Krispy Kreme Doughnut Corp. to SGL-4 form SGL-3, indicating weak liquidity. Moody’s also revised the rating outlook to negative from stable and affirmed Krispy Kreme’s Caa1 corporate family rating and B3 rating of its $160 million senior secured credit facilities.
"The negative outlook reflects the challenge management faces of dramatically and quickly turning the operating performance to avoid any potential covenant violations," Moody’s said. "Ratings could be further downgraded should the risk of a potential covenant violation come to fruition, should liquidity become constrained, or should the decline in operating performance not show signs of improvement."
Moody’s said the downgrade to SGL-4 reflects the belief that Krispy Kreme may have difficulty meeting its forecast and covenant requirement over the next 12 months.
"Krispy Kreme’s continued trend of weak EBITDA generation is expected to persist over the next 12 months, highlighted by further store closures and the reduced supply chain revenues associated with a shrinking store base, thereby causing very weak covenant cushion," Moody’s said.
Moody’s said Krispy Kreme, Winston-Salem, N.C., showed cash of $25 million on its balance sheet in July that could be used to pay down some debt. However, Moody’s expects the company will need to obtain covenant relief or a waiver from its creditors to avoid a breach in the next 12 months unless cash flow generation improves significantly or asset sales generate alternative liquidity. Asset sales outside the normal course of business are capped at $10 million as governed by the agreement, Moody’s said.
"In addition, Moody’s expects Krispy Kreme will have no or very limited access to its revolving credit facility in the next 12 months due to the exhausted cushion under its financial covenants," Moody’s said.
Krispy Kreme sustained a loss of $27 million for the second quarter ended July 29. Steps to improve performance will include closing or improving underperforming company shops, planning to divest an underutilized manufacturing facility in the Krispy Kreme supply chain, realigning company stores and franchise management, and continuing to expand internationally., said Daryl Brewster, president and chief executive officer, when results were reported Sept. 6.