Tasty Baking liquidity 'extremely tight,' exploring alternatives

By Caroline Salls

Pittsburgh, Jan. 5 - Tasty Baking Co. is experiencing "extremely tight liquidity" in light of lower than expected cost savings from its new Philadelphia bakery, the impact of the bankruptcy filing made by The Great Atlantic & Pacific Tea Co., Inc. and a sharp rise in commodity costs, according to a company news release.

In response to these circumstances, Tasty Baking said it has entered into discussions with its bank group led by Citizens Bank to explore various alternatives to address its current liquidity needs, including increasing the amount of funds available under the company's bank line of credit, as well as addressing the current and future covenant requirements under its credit agreement.

While discussions are ongoing, the bank group has agreed to defer all principal payments and credit facility reductions until Jan. 14.

According to an 8-K filed with the Securities and Exchange Commission, there is $81.5 million outstanding on the Citizens Bank credit facility.

Specifically, under the loan amendment the company is not required to make payments of principal due on Jan. 1 until 2 p.m. ET on Jan. 14, and the $1 million reduction in the bank's commitment under a working capital line of credit will now occur on Jan. 14 instead of on Dec. 31.

The bank group also agreed to waive any events of default resulting from Tasty Baking not expecting to be in compliance with financial covenants as of Dec. 25.

However, if the company is not in compliance with any of these amended terms or the financial covenants as of Jan. 15 or by 2 p.m. ET on Jan. 14 with regard to the payment of principal, then an event of default would occur under the bank agreement without the need for further notice and without an opportunity to cure.

Also under the amendment, the bank agreement interest rates will increase to 7.5% for the company's Job Bank loan, 4.75% for letters of credit and Prime rate plus 200 basis points for all other amounts owed on the credit facility.

Loan, lease deferrals

In addition, the lenders for the Tasty Baking's loans from the PIDC Local Development Corp. and the machinery and equipment loan fund of the Department of Community and Economic Development of Pennsylvania, along with the landlords for the company's leases at the new bakery and its office headquarters in Philadelphia, have also agreed to defer payments due on some loans and leases until Jan. 31.

Evaluating financial options

Along with the bank group discussions, the company has hired Janney Montgomery Scott LLC as its financial adviser to help Tasty Baking evaluate various possible financial and strategic options.

The company said these options include refinancing the company's long-term debt due in September 2012, raising additional capital, a potential combination with another company as part of the consolidation occurring in the baked goods industry or a potential sale of the company.

Production problems

The company said it did not achieve its expected operational cash savings from the new Philadelphia bakery during the fourth quarter as a result of production difficulties.

"As of Nov. 1, 2010, our expectation was that a run rate of $13 million in annualized pre-tax cash savings, net of facility leases but before debt service, would be achieved by the end of the fourth quarter," president and chief executive officer Charles P. Pizzi said in the release.

"Due to unanticipated operational challenges, the run-rate savings at the end of the fourth quarter of 2010 is now expected to be approximately $10 million."

During the evaluation process, the company said it will continue to operate its two modern bakeries and produce, distribute and sell Tastykake products to its customers and consumers.

"While this has been a challenging period for us operationally, we remain focused on growing the business," Pizzi said in the release.

"To that end we continue to partner with new grocery and convenience store customers within our core markets, increase penetration with key customers, and launch new products into the marketplace.

"Finally, despite the challenges we have faced, we have continued to outpace the category and grow our overall market share."

Tasty Baking is a Philadelphia-based manufacturer, co-packager and seller of sweet baked goods.

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