Capital Markets

Moody’s Weighs In on Default Battle

The lastest volley in the debt covenant scrap between Nash Finch and hedge fund investors is fired by the ratings agency.
Stephen TaubOctober 4, 2007

Moody’s Investors Service is the latest to weigh in on the dispute between Nash Finch and investors who claim the company recently defaulted on its convertible notes. The rating agency said that if the investors get their way, Nash’s debt rating will probably be downgraded.

The dispute started in July when the food distributor raised the quarterly cash dividend on its common stock to 18 cents per share. The investors, which include hedge funds, said this act put the company in default under the covenants of its convertible notes unless it changes the conversion rate as a result of the dividend hike.

Nash Finch’s position is that it made all required adjustments to the conversion rates on the notes following the dividend increase, and it is disputing the claim that a default has occurred. The company filed a petition in Hennepin County District Court in Minnesota asking the court to determine that it has properly adjusted the conversion rate on the notes. As a result, the Mineapolis court recently issued a temporary restraining order enjoining the note holders from accelerating the debt, and extended the cure period during which Nash Finch can rectify the default should it be required to do so.

However, on Wednesday, Moody’s announced that it placed the debt under review for possible downgrade. “While there is no immediate effect on the cash position or liabilities of the company, the notice of default raises the risk — if the case is not dismissed or if the default is not cured quickly after the court’s final ruling — that the notes could be put back to the company or that cross default provision in the company’s bank credit facilities could be triggered,” Moody’s wrote in an advisory.

If the issue is resolved in Nash Finch’s favor, with no adverse effect on the credit or liquidity of the company, Moody’s said it expects that it would confirm the company’s existing rating, which is B2. Moody’s also pointed out that the company has stated publicly that if the court rules in the investors’ favor, they would cure the default by adjusting the conversion rate.