Associated Brands Income Fund
TSX : ABF.UN

Associated Brands Income Fund

April 23, 2007 09:12 ET

Associated Brands Announces Expected Financial Covenant Defaults under Debt Agreements

TORONTO, ONTARIO--(CCNMatthews - April 23, 2007) - Associated Brands Income Fund (TSX:ABF.UN) (the "Fund" or "Associated Brands") announced today that, based on its preliminary unaudited interim consolidated financial statements for the three months ended March 31, 2007, it expects that certain of its subsidiaries were in default as at March 31, 2007 under financial covenants under their credit agreement with a Canadian chartered bank and under the exchangeable debentures of Associated Brands Holding Limited Partnership ("ABHLP").

The preliminary unaudited interim consolidated financial statements for the three months ended March 31, 2007 remain subject to the review and approval by the audit committee of the board of trustees of the Fund's wholly-owned subsidiary Associated Brands Operating Trust ("ABOT") and by the board of trustees of the Fund and of ABOT, as well as the review by the auditors of the Fund. Such reviews are expected to be completed in the next few days.

The financial covenant at issue under the credit agreement requires the Fund to maintain its funded debt (which represents all of the Fund's interest bearing bank indebtedness) at a ratio of not more than 3.25 to 1 over its Normalized EBITDA (as defined and calculated under the credit agreement) . The financial covenant at issue under the exchangeable debentures requires the Fund to maintain its specified debt (which represents the Fund's funded debt (which has the same meaning as under the credit agreement) and the exchangeable debentures) at a ratio of not greater than 4.75 to 1 over its Normalized EBITDA (which also has the same meaning as under the credit agreement). The ratios under such financial covenants had become more stringent as of March 31, 2007 as compared to previous months in accordance with the respective terms and conditions of such credit agreement and exchangeable debentures. In addition, a default under the financial covenant at issue under the credit agreement would result in a cross-default under the exchangeable debentures. Upon confirmation that these defaults have occurred, the Fund's long-term debt with the bank and the debentureholders will be reclassified from long-term liabilities to current liabilities on its consolidated financial statements as of March 31, 2007 which will result in an additional default under the covenant under the credit agreement relating to the Fund's working capital ratio. The defaults under the credit agreement would also result in a default under the ISDA Master Agreement between a subsidiary of the Fund and the same bank that is the lender under the credit agreement.

The Fund believes that the expected defaults under the financial covenants are due to an increase in bank indebtedness as at March 31, 2007 resulting from increased inventories to support revenue growth, as well as a lower rolling 12 month Normalized EBITDA.

The credit agreement and the terms of the debentures provide the bank and the debentureholders, respectively, with certain rights and remedies during the continuance of a default, including the right to accelerate the debt due under the credit agreement and the debentures, respectively, and the right to realize upon security that has been granted by the Fund's subsidiaries.

"The Fund has notified the bank and the debenture holders of these expected defaults and will be requesting that the bank and the debentureholders waive such defaults", commented Rob Dougans, President and Chief Executive Officer.

There can be no assurance that the bank or the debentureholders will not exercise their respective rights and remedies during the continuance of any defaults under the credit agreement or the debentures, as applicable. In addition, if the bank or the debentureholders exercise their rights and remedies, there can be no assurance that a replacement facility can be obtained in order to permit the repayment of indebtedness under the credit agreement or the debentures, as applicable, or that, if such a replacement facility is obtained, it will be obtained at costs, or on terms and conditions, comparable to those of the Fund's current indebtedness.

Funds managed by Torquest Partners Inc. hold 85.1% aggregate principal amount of the outstanding debentures. As previously announced, the Fund and ABOT have agreed to sell their debt and equity interests in the operating subsidiaries of the Associated Brands business to a wholly-owned subsidiary of a fund managed by an affiliate of Torquest Partners Inc., with proceeds of such sale being distributed to unitholders of the Fund by way of the redemption of outstanding units at a cash redemption price of between $0.80 and $0.82 per unit. A special meeting of unitholders of the Fund has been called for May 4, 2007 to consider, and if deemed advisable, approve such transaction and the termination of the Fund and ABOT. If the bank and the debenture holders do not grant waivers for the expected defaults under the debt agreements as requested by the Fund, then the purchaser under the sale agreement for the Associated Brands operating subsidiaries may claim that a closing condition in its favour under such purchase agreement has not been satisfied and relieves the purchaser of its obligation to complete the sale transaction. There can be no assurance that the purchaser will not make this claim or claim the exercise of any other rights or remedies in respect of the expected defaults under the debt agreements and in connection with the proposed sale transaction.

ASSOCIATED BRANDS INCOME FUND (TSX:ABF.UN), through its operating subsidiaries, is a leading North American manufacturer and supplier of private-label dry-blend food products and household products. Since beginning operations in 1985, Associated Brands has grown to become one of the three largest suppliers of a diverse range of private label dry blend food products in North America, producing over eleven million cases annually across multiple product categories currently sold to 45 of the 50 largest North American food retailers. Associated Brands plans to build unitholder value by leveraging its solid presence in the U.S. private label market, expanding its product offerings to current and new customers and adding additional contract manufacturing business, and through accretive acquisitions that meet its strict operating and strategic criteria. More information can be obtained at www.associatedbrands.com.

This press release contains certain forward-looking information and statements. Forward-looking information typically contains statements with words such as "consider", "anticipate", "believe", "expect", "plan", "intend", "may", "will", "likely" or similar words suggesting future outcomes or statements regarding an outlook for, or future changes in, the Fund's and its subsidiaries expected non-compliance with its debt obligations, the proposed sale of the Fund's and ABOT's debt and equity interests in the operating subsidiaries of the Associated Brands business, the Fund's financial performance, results of operations or distributions or other expectations, future events or performance. Although the Fund believes that the expectations reflected in these forward-looking statements are reasonable, readers should not place undue reliance on forward-looking information and should be aware that forward looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements of the Fund to differ materially from those suggested by the forward-looking statements. These factors include, but are not limited to, the possibility that the final financial results of the Fund for the three months ended March 31, 2007 are different than the preliminary results on which management's expectations about defaults under the debt agreements are based, the possible failure to successfully plan and execute business improvement strategies; restrictions and covenants contained in the Fund's credit agreement and under the terms of its exchangeable subordinated debentures and the existence of defaults under such covenants; the possibility that the proposed transaction is not complete due to, among other things, any conditions to closing under the purchase agreement not being satisfied or waived; the absence of long term sales contracts; possible failure to develop new product offerings; operating hazards; sensitivity of sales to weather conditions; product liability; compliance with or changes in environmental, health and safety and other regulations; changes to income tax legislation, possible declines in vertical industry markets (grocery, foodservice, industrial and contract manufacturing); competition; reliance on key personnel; possible labour action; volatility in commodity prices and other input materials prices; foreign exchange exposure; exposure to floating interest rates; exposures under derivative financial instruments; the possible failure to expand into the United States; changes in consumer preferences; and capital expenditures.

The above list of important factors affecting forward-looking information is not exhaustive, and reference should be made to the other risks discussed in the Fund's filings with Canadian securities regulatory authorities. The Fund undertakes no obligation, except as required by law, to update publicly or otherwise any forward-looking information, whether as a result of new information, future events or otherwise, or the above list of factors affecting this information.

Contact Information