11/3/05 Dow Jones News -- Krispy Kreme Waivers Pave Way For Franchisee Transactions ................
November 3, 2005 2:29 p.m.
Krispy Kreme Waivers Pave Way For Franchisee Transactions
By MARY ELLEN LLOYD
DOW JONES NEWSWIRES
CHARLOTTE -- Krispy Kreme Doughnuts Inc. (KKD) disclosed Thursday that it's working on several transactions that could reduce its exposure to franchisee debt, which has grown in recent months as several operators have struggled.
In a filing with the Securities and Exchange Commission, Krispy Kreme said it has received waivers to its credit agreements, a necessary step to complete its next moves.
The waiver agreements say Krispy Kreme's creditors won't declare a default, which could accelerate repayment deadlines, as a result of several steps under consideration. It was not immediately clear what the creditors would receive in granting the waivers.
An outside spokesman for Krispy Kreme declined to comment on the filing, but company watchers said the agreements appear to give the troubled doughnut maker some financial flexibility.
"The big picture is they're looking to get out of some of these joint-venture agreements they made with franchisees, and especially the financial obligations that are associated with them," said Steven Clark, an assistant professor of finance at the University of North Carolina at Charlotte.
"Certainly all of these amendments they're making are going to reduce the probability that Krispy Kreme itself goes into default, because they're getting out from under some guarantees they made to franchisees," Clark said.
Krispy Kreme shares rose on the news, recently traded at $4.78, up 33 cents, or 7.4%.
In the filing, Krispy Kreme discussed intended deals involving franchises in Canada, Pennsylvania and Australia, all of which had received loans from Krispy Kreme or had loans guaranteed by the troubled doughnut maker. Krispy Kreme has been working nearly a year to restructure its finances amid weakening sales and investigations into its accounting and dealings with franchisees.
The Winston-Salem, N.C., company intends to acquire substantially all of the assets of Kremeko, the developer for eastern and central Canada that filed for protection from creditors earlier this year, according to the filing. In exchange, Krispy Kreme would transfer its indebtedness tied to the franchise to a new subsidiary created later.
Krispy Kreme had guaranteed $17 million in loans to Kremeko, which the Canadian franchisee's creditors tried to tap, and had offered $1.5 million in debtor-in-possession financing for the restructuring. Kremeko in August ended its search for buyers after turning down three bids considered unacceptable, according to filings with the Canadian court.
Krispy Kreme said in the filing Thursday that it intends to give up its equity stake in its Erie, Pa., and Pittsburgh franchises in exchange for the cancellation of $3.4 million in loan guarantees it made on behalf of the developers. The company will, however, make a $300,000 loan to Amazing Glazed LLC, the Pittsburgh area developer, according to the filing.
Krispy Kreme also wants to sell its stake in the Australian and New Zealand developer, KKA Holdings Pty Ltd, back to the developer for approximately A$3.5 million.
Krispy Kreme hasn't filed required quarterly and annual reports with the SEC in more than a year, but its last listing of joint ventures showed the company owned 35% of the Australian developer, 30% of Amazing Glazed and 33% of Amazing Hot Glazers, the Erie developer.
Krispy Kreme also disclosed that it had accounted for some motor fleet vehicle leases as operating leases but has now determined they should have been accounted for as capital leases.
In another part of the filing, lenders agreed to waive any defaults prompted by the failure of Krispy Kreme to disclose a loan of GBP1.2 million to its United Kingdom area developer in its original credit agreement.
Clark said such complicated moves are representative of a company trying to make a financial turnaround.
"In any turnaround situation, what you want to do is identify what is the core part of your business that can be successful," he said. "To some extent, they'd become almost a venture capital fund with all the joint ventures and elaborate financing. My guess is they're trying to get out of a lot of that and scale back to where they started, making doughnuts without all the elaborate financing and joint ventures that go along with it."
In April, Krispy Kreme secured some financial breathing room when it signed three new credit facilities arranged by Credit Suisse First Boston and Silver Point Finance LLC. Proceeds of a $120 million, second-lien senior secured term loan were used to repay Krispy Kreme's previous senior lenders, which included Wachovia Corp. (WB) and BB&T Corp. (BBT), and boost cash reserves.
At that time, Krispy Kreme also obtained a a $75 million first-lien senior secured revolver and a $30 million second-lien prefunded revolver and letter of credit facility for shorter term financing.
Corporate web site: krispykreme.com
-By Mary Ellen Lloyd, Dow Jones Newswires, 704-371-4033; maryellen.lloyd@dowjones.com
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