MINNEAPOLIS -- Nash Finch here said it has been notified that it is in technical default on $165 million in notes because it has not filed certain financial reports. The retailer/wholesaler also released preliminary financial results for fiscal 2002 that showed a gain in profitability but a decline in sales for the year.
Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings all lowered their ratings on the company's debt, citing weakness in the company's financial performance, the failure of the company to find an accountant that will certify its reports, and the ongoing Securities and Exchange Commission investigation into the company's accounting methods.
Moody's said it did not believe Nash Finch would be able to file its third- and fourth-quarter financial results by the March 15 deadline set by the trustee of the notes. If the company cannot obtain a waiver from the trustee, the debt would be payable immediately, according to Moody's, which could force a bankruptcy filing, other analysts said.
The company said it would also be in default on its $100 million bank credit facility if it does not remedy the default on the notes within 30 days.
Nash Finch could not be reached for comment. In a statement filed with the SEC, Ron Marshall, chief executive officer, Nash Finch, said the company continues to believe that its accounting has been correct.
"We are working closely with our lenders to ensure continued liquidity," he said. "We believe Nash Finch continues to be operationally strong and healthy, and I am confident we can work through the issues facing us."
Michelle Barishaw, senior director, corporate finance, Fitch Ratings, said she thought Nash Finch might be able to obtain a waiver on the default if the SEC's Office of the Chief Accountant approves the company's accounting methods. As previously reported, the SEC is investigating Nash Finch's accounting for count-recount charges, which are used to calculate vendor allowances.
Nash Finch has asked the SEC to approve its accounting methods, which one analyst said would facilitate the retention of new auditors. The company dismissed Ernst & Young last year, and Deloitte & Touche resigned last month after a disagreement over Nash Finch's accounting methods.
"Assuming they can get that resolved and they are current on their interest payments, I can't see why the banks won't give them just a little more time," Barishaw said. "What advantage do they have by putting this really into default?"
She also said it was unclear what prompted the trustees of the notes to place Nash Finch in technical default at this time when the company's financial filings were already long overdue.
She said Fitch was prompted to lower its ratings on Nash Finch's debt because of the information the company provided on its core business.
"I think it's a tough environment right now, and it's a low-margin business to begin with," she said. "We think they face some challenges, and their business is going to continue to be under pressure."
Nash Finch said that, assuming its current accounting methods are correct, it earned $29.7 million in net income on $3.9 billion in sales in 2002, vs. $21.2 million on $4 billion in sales in the preceding year.
In the 16-week third quarter ended Oct. 5, 2002, the company reported a net income of $7.3 million, vs. $6 million in the year-ago period. In the 12-week fourth quarter ended Dec. 28, 2002, net income was $8.4 million, compared with $6.7 million a year ago.
One analyst, who asked not to be identified, told SN those results might be strong enough for Nash Finch to obtain a waiver on the default.