Source: Bloomberg
Bumble Bee Foods LLC had its credit rating cut by Moody’s Investors Service and Standard & Poor’s as the canned tuna maker acquired by Lion Capital LLP in December plans $150 million of debt to fund a payout to its owner.
The senior pay-in-kind toggle notes due 2018 may yield 10 percent at an original issue discount of two points and be priced as soon as Monday, according to a person familiar with the sale, who declined to be identified because terms aren’t set.
“The downgrade reflects Bumble Bee’s increased leverage and our view of management’s very aggressive financial policy, as demonstrated by its plans to issue a debt-financed dividend following the very recent purchase of the company,†S&P analysts Bea Chiem and Christopher Johnson wrote in a note Monday, assigning the notes a CCC+ grade.
S&P cut Bumble Bee’s credit rating to B from B+ while Moody’s downgraded the San Diego-based company’s credit rating to B2 from B1. As investors pour cash into high-yield bond funds, sales of PIK debt, which pay interest in the form of cash or additional debt, have jumped past $1 billion this year from $375 million in all of 2010, according to data compiled by Bloomberg.
“If the company chooses not to pay cash interest, the toggle notes will represent a growing liability on Bumble Bee’s balance sheet, which will affect its ability to reduce leverage over time,†the S&P analysts wrote in the note.
Deposits into high-yield funds this year of $7.9 billion compare with $12.5 billion during 2010, JPMorgan Chase & Co. strategists wrote in a March 4 note.
Bumble Bee was purchased by funds advised by Lion Capital from Centre Partners Management LLC in a transaction valued at about $980 million, according to the company’s website.
Moody’s assigned the proposed debt a Caa1 grade and said that “the ratings are unlikely to be upgraded in the near-term as a result of Moody’s view that Bumble Bee’s financial policies will continue to be aggressive given its private equity ownership,†according to a note Monday.
PIK offerings peaked in 2007 when companies issued $15.2 billion of the securities, Bloomberg data show. Offerings fell to $7.8 billion in 2008 and tumbled to $1.7 billion in 2009, the data show.