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Tops added to new Fitch debt watch list

Tops Holdings, the highly leveraged owner of the Tops Markets supermarket chain, has been added to a list of companies whose debt has been labeled a "concern" by one of the nation's three main credit rating agencies.

Tops landed on the list of at-risk retailers because of a distressed debt exchange it completed in August, something Fitch Ratings considers a default. Tops Markets said the transaction in question was just a technicality and that the company is fully confident it has strong enough cash flow to cover its bills.

Fitch published two lists, including one of retailers it considered to be at high risk of defaulting. Tops didn't appear on that list, being listed instead in a secondary group of companies that still had financial flexibility but were considered distressed.

Some of the key financial criteria at the company that are closely watched by bond owners have weakened since 2016, due to falling dairy and meat prices that have hurt the chain's revenue growth. As a result, Tops over the past two quarters has been generating roughly enough cash to meet its interest payments, but not enough to build a cash cushion that could insulate the company from a downturn in either its business or the economy.

Tops executives, however, said the supermarket business is on track. It said the "distressed debt" characterization overstated the financial challenges the supermarket chain faces because of a high debt load. That debt, which now tops $627 million, has been built up through a series of leveraged buyouts at Tops since it was sold by Ahold in 2007.

"There was no default, no distress, our bondholders were extremely supportive in doing what we've done," said Frank Curci, chairman of the board at Tops.

Fitch publishes a Primary Bonds of Concern list each month, which spotlights companies at the highest risk for default. The Secondary list, published for the first time late last month, compiles companies that are "distressed but have more flexibility" than the high-risk companies on the primary list, according to Alyssa Castelli, a Fitch spokesperson.

Under Fitch's criteria, there are three events that can trigger what it considers a default: a bankruptcy filing, a missed payment or a distressed debt exchange, the company said.

"While Tops hasn’t filed for bankruptcy or missed a debt payment, they did complete a distressed debt exchange in August and as a result we considered the debt that was exchanged in default," said Alyssa Castelli, a spokesperson for Fitch Ratings.

In a distressed debt exchange, a company proposes new or restructured debt in order to gain more breathing room on debt payments and increase liquidity.

But Tops says what happened in August should not be considered a distressed debt exchange, and has only been characterized that way because of a technicality of the agencies' ratings systems.

In August, Tops exchanged about 12 percent of its debt at a slightly higher interest rate and postponed the debt payment's due date by 3.5 years in an even exchange for 100 cents on the dollar. That portion of debt would have been due in June 2018 if its maturity hadn't been extended.

It is common for companies to refinance debt that is on the verge of coming due so they have more time to pay it back.

"We addressed it ahead of time. It was never really our intention to pay that off totally anyway, and our bondholders knew that," Curci said. He added later, "They knew that an exchange would come up at some point in time, and we decided to do it a year in advance so that there was never any question about our ability to pull that off."

Tops has carried a heavy debt load since Morgan Stanley Private Equity bought it from Ahold. The debt load grew more after management bought the supermarket chain from Morgan Stanley in a highly leveraged buyout four years ago. Tops said its bondholders understand that debt will be part of its balance sheet for years to come, and that the company has enough cash to meet its obligations going forward.

"We still have strong market share, strong cash flow. We've been meeting all of our obligations, we're happy with our place in the market and we're optimistic about the future," Curci said.

The company, which is in the midst of renovating and evaluating stores in its chain, confirmed Thursday it will close two stores in southeast New York and Worcester County, Mass., by Dec. 30.

Tops said the stores, which were acquired in 2016, weren't performing to the company's standards, citing the stores' location, size and what they said was a lack of visibility.

Tops has unfavorable ratings from the other two big credit-rating agencies, Moody's and Standard & Poor's.

Standard & Poor's rates Tops CCC+, a designation that means a company is "not likely to meet its financial commitments" on a debt in the event of adverse business, financial or economic conditions, according to criteria published by the agency. Moody's gives Tops a rating of Caa1, which deems it in "poor standing" and "subject to very high credit risk" according to the agency's rating scale definition.

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