The firm has released a report called "A reference guide to US food and restaurant bankruptcies and fallen angels". It identifies the financial stresses that lead to bankruptcy in the food industry, looking at Chiquita, Krispy Kreme Doughnuts and Interstate Bakeries as previous examples. Higher prices were determined as one of the leading stresses for companies struggling financially, as increased costs have reduced margins. Added to this is the pressure growing from weak consumer spending. "Increased commodity cost may be a structural change in the food industry," said Wesley Moultrie, senior director at Fitch. "The global supply and demand dynamics for agricultural commodities may have permanently shifted, thus increasing companies' cost structures for the long term." The report said that companies with financial problems are unable to deal with the challenges posed by changes in the industry. It said high yield low investment grade food companies experiencing particular declines in profitability and cash flow. Carla Norfleet Taylor, director at Fitch, said: "Regardless the trigger, the presence of high debt levels will always compound the effects of operating challenges that are often out of a company's control." Early warning signs for bankruptcy The report identifies five warning signs for companies that lead to bankruptcy:
- A persistent decline in cash flow from operations
- Cash availability has also declined
- Recurring amendments to credit arrangements in order to relax covenants
- Structural changes in the industry
- Excessive management turnover
It said constant monitoring is required to identify the signs, which develop over time. However, for commodity-oriented food companies, such as Chiquita, whose earnings are more cyclical, identifying changes is more difficult. Chiquita Fitch identifies fruit, vegetables and processed foods company Chiquita as a "fallen angel". It filed for bankruptcy in November 2001 to restructure $862m of publicly held senior notes and subordinated debt. Chiquita exited bankruptcy in March 2002. The company was subject to changes in the market situation that was beyond its control. Because of high European banana tariffs and fuel prices (for example, oil has recently reached record prices of $120 a barrel), "the fresh produce industry is currently undergoing one of its most challenging periods," said the report. Market share was reduced and export costs were significantly increased between 1993 and 2001. In 1999, Chiquita made multiple amendments to its credit agreement in order to loosen financial covenants, and ultimately pledge assets as security. Then in January 2001, it announced the restructuring of publicly traded debt to "resolve upcoming debt maturities and improve financial liquidity; discontinued interest and principal payments". This was followed by it filing for bankruptcy. The report said: "Chiquita's decision to arrange a pre-packaged bankruptcy was driven by several years of structural changes in European banana trade policies that caused the company to lose market share and incur significant increases in the cost of exporting bananas into Europe. "These challenges were magnified by the high level of debt in the company's capital structure." It said constant monitoring is required to identify the signs, which develop over time. However, for commodity-oriented food companies, such as Chiquita, whose earnings are more cyclical, identifying changes is more difficult.Fitch identifies fruit, vegetables and processed foods company Chiquita as a It filed for bankruptcy in November 2001 to restructure $862m of publicly held senior notes and subordinated debt. Chiquita exited bankruptcy in March 2002.The company was subject to changes in the market situation that was beyond its control. Because of high European banana tariffs and fuel prices (for example, oil has recently reached record prices of $120 a barrel), said the report.Market share was reduced and export costs were significantly increased between 1993 and 2001.In 1999, Chiquita made multiple amendments to its credit agreement in order to loosen financial covenants, and ultimately pledge assets as security.Then in January 2001, it announced the restructuring of publicly traded debt to This was followed by it filing for bankruptcy.The report said: