NEW YORK -- Standard & Poor's ratings group here has lowered its ratings on securities of Farm Fresh, Norfolk, Va., following weaker-than-expected cash flow coverage of interest expense, the agency said.
iple-C-plus from single-B-minus, resulting in an implied senior rating of single-B, according to an S&P statement issued late last month.
Farm Fresh operates 66 stores, including 58 combination stores and eight warehouse stores, in Virginia. The company, already highly leveraged from its 1988 buyout, took on additional debt last year as a result of acquisition of 15 stores in Richmond, Va., from Safeway, Oakland, Calif.
It closed three of the Safeway units, sold three and converted the other nine to its combination-store format.
According to S&P, the $40 million Farm Fresh earned in 1993 before interest, taxes, depreciation and amortization covered interest expense only 1.4 times. Once the interest expense of Farm Fresh's parent company, FF Holdings, is included, then the interest coverage drops to just over one time, S&P said.
"S&P believes that the senior secured debt holders are better protected than unsecured bond holders, leading to a two-notch downgrade on the senior notes," the rating agency said.
"Debt maturities are minimal in the next few years, and interest expense on the holding company notes is payable in additional notes rather than cash, but the rating also considers significant refinancing risk. A sinking fund payment of $100.5 million is due in 1999," S&P said.