Parmalat USA, Farmland and Milk Products units file for Chapter 11

By Jeff Pines

Washington, Feb. 24 - Parmalat USA Corp. and its subsidiaries Farmland Dairies LLC and Milk Products of Alabama LLC filed for Chapter 11 Tuesday, according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

All three companies are units of Italy's Parmalat Finanziaria SpA, which itself is mired in financial difficulties. Their parent's troubles spilled over, wreaking havoc with the American units' business relationships, when suppliers began insisting on strict payment terms, such as cash on delivery or prepayment, the U.S. subsidiaries said in a court filing.

Parmalat USA's core business is processing, packaging and selling fresh milk to grocery stores. Matters worsened, it said, when two top salespersons defected to its biggest competitor.

Since November 2000, Farmland and Milk Products used a receivables purchase agreement for liquidity. Citibank became the agent on Dec. 11, 2003. Citibank notified the company and its subsidiaries on Dec. 26 a default may have occurred.

Most of Farmland's equipment is leased through GE Public Finance as the agent. Farmland received default notices on Dec. 16 and Dec. 30. In addition, it missed a $3.2 million lease payment due Feb. 1. About $95 million remains on the lease.

Suffering from a deteriorating financial condition and few sources for cash, Parmalat USA's management said it decided the best thing to do would be to sell its businesses.

To help it, the company retained Lazard Freres and Co. LLC before it filed for Chapter 11 and has filed a motion to retain the firm as a financial advisor and investment banker. The company thinks it will file a motion for court approval to for a sale process of its businesses in the near future.

"A number of prospective purchasers have signed confidentiality agreements and are in the process of conducting diligence. Certain of those parties have executed non-binding letters of intent," Parmalat USA said.

In addition, it also is seeking permission to retain Alix Partners as a financial advisor.

According to a court filing, Parmalat USA's need for liquidity is urgent with little cash to fund its ongoing operations. "Put simply, the going concern value of the debtors' businesses would be obliterated without the financing sought herein."

Toward that end, Parmalat USA has negotiated a $35 million debtor-in-possession credit agreement with General Electric Capital Corp. for which it will need court approval. The proposed financing will have an interim facility of $17.5 million and if the court gives final approval the remaining $17.5 million will become available. The companies have either paid or will pay about $1 million in fees and expenses to the post-Chapter 11 lenders. The facility will mature at the earliest of: Aug. 23, 2004; the effective date of a reorganization plan; an order converting the reorganization into a Chapter 7 liquidation; or dismissal of any of the Chapter 11 cases.

In addition, Citibank has agreed it will provide further funding under the receivables agreement if Citibank is given a first-priority interest, shared with General Electric Capital and the post-petition lenders, in the post-petition collateral. The borrowers also have to agree to pay Citibank $1.5 million to reduce its overpayments for the receivables.

Parmalat USA is also seeking to consolidate all three corporate filings into one case.

Among Parmalat USA's creditors are Comerica Bank, which it owes $10 million. A court filing estimates Farmland has both assets and debts of more than $100 million.

The filing also shows that the joint provisional liquidators of Parmalat Capital Finance Ltd, Dairy Holdings Ltd. and Food Holdings Ltd, filed proceedings under Section 304 of the bankruptcy code in the bankruptcy court for the Southern District of New York on Jan. 20. All three entities are involved in bankruptcy proceedings in the Grand Court of the Cayman Islands.

The court issued a temporary restraining order on Jan. 21 preventing anyone from taking actions against the entities pending a request for a preliminary injunction.

The entities' parent Parmalat Finanziaria SpA filed an objection on its behalf and of all of its subsidiaries on Jan. 28. A day later the bankruptcy court extended the restraining order until March 2. The court will then hold a hearing on the preliminary injunction and extending Parmalat's restraining order until March 19.

Parmalat USA's Chapter 11 case number is 04-11139.

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