Credit line is frozen for Royal Ahold NV

Borrowing is suddenly not so easy for company

March 05, 2003|By Paul Adams | Paul Adams,SUN STAFF

The Dutch parent of Giant Food Inc. and Columbia-based U.S. Foodservice said yesterday that its lenders have frozen the remainder of a $2 billion line of credit while the company negotiates a new loan that will come with the kind of restrictions normally reserved for borrowers that have strained financial credibility.

The news comes a week after Royal Ahold NV, the largest grocery store owner on the East Coast, disclosed that it had overstated earnings by at least $500 million in 2001 and 2002 as a result of questionable accounting at its U.S. Foodservice unit.

Federal officials and the company's own auditors are investigating whether U.S. Foodservice executives inflated the value of discounts paid by vendors in exchange for promoting their goods.

Ahold has drawn $550 million of the $2 billion credit line, but the rest is frozen until March 14. The company says it can meet its financial obligations while it completes negotiations for a new $3.4 billion line of credit. Analysts say the talks are likely being slowed by uncertainty over the depth of the company's U.S. Foodservice troubles. Some analysts fear that the inflated earnings could exceed the $500 million estimate.

"Given the current situation with their bookkeeping, I can imagine that these negotiations take a bit longer," said Oscar Poos, an analyst with Oyen & Van Eeghen in Amsterdam. "It's definitely not a comforting story, but for the time being it's no reason for even more worries."

The company's credit concerns are symbolic of how far Ahold's financial standing has fallen in a matter of days. Not long ago, analysts said, it would have taken the world's third-largest retailer no more than a day or so to secure new credit. But the announcement of overstated earnings prompted credit agencies Standard & Poor's, Moody's Investor Service and Fitch Ratings to cut Ahold's credit rating to junk and has created a wave of unease among lenders and Dutch investors.

"To say it's Enron with clogs and tulips is probably a bit harsh," said Timothy Attenborough, an analyst with BNP Paribas in London. "But this has absolutely rattled shareholders. Everyone in Holland owns shares, and it's been shaken to the roots."

Of Ahold's new $3.4 billion credit line, about $1.4 billion will come in the form of secured loans, said Alexandre Casas, an analyst with CDC IXIS Securities in Paris. That means Ahold will have to offer property or some other consideration to back the credit facility.

Of greater concern, Casas said, is whether the company's suppliers will demand tougher credit terms, forcing a cash crisis that could financially cripple the company.

Such a scenario could force Ahold to sell major assets quickly or seek bankruptcy protection. For now, Casas said, the company seems to have its finances under control.

Analysts are also waiting anxiously to see whom Ahold picks to replace Cees van der Hoeven, the chief executive who resigned last week following the accounting disclosures.

If the company chooses a leader with a purely financial background, rather than a retail expert, that could suggest Ahold's financial troubles are deeper than many think.

"The market will interpret that as [a sign] the company is not viable and you have to break it up," Casas said.

Potential candidates for the job include Luc Vandevelde, chairman of London retailer Marks & Spencer, and Carlos Criado Perez, chief executive of Britain's Safeway PLC, among others.

The new chief executive officer will inherit a company that is accused of using aggressive accounting in the past two years to boost its financial results.

In a June 2001 report, the Center for Financial Research and Analysis Inc., a financial watchdog firm based in Rockville, suggested that Ahold had "obtained a significant earnings boost" by changing how it accounted for goodwill related to acquisitions.

In addition, the company began amortizing the cost of software upgrades over three to five years, rather than fully recording such purchases in the year in which they occurred.

The report also says that Ahold reduced its reserve for customer accounts that are likely to go uncollected, resulting in a small bump in earnings. The allowance for doubtful accounts fell to 3.64 percent of gross accounts receivable in 2001 from 4.09 percent in 2000 and 5.17 percent in 1999, the report said.

U.S. shares of Ahold, which have plunged 66 percent since last week's disclosure, lost 43 cents in trading yesterday to close at $3.63.

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