NEW YORK: Del Monte Foods Inc is overhauling its debt in a restructuring plan that leaves creditors that don’t participate at the bottom of the payout pecking order.

The canned fruit company plans to move its assets into a newly created legal entity, according to people familiar with the situation.

The strategy - known in industry parlance as a drop-down transaction - allows Del Monte to raise fresh liquidity by borrowing against the transferred assets. The deal will prioritise participating lenders via debt swaps, said the people, who asked not to be identified discussing a private matter.

The Walnut Creek, California-based company’s earnings have been under pressure as consumers veer away from canned goods toward fresher options.

The debt-restructuring plan should relieve some of the liquidity concerns the firm faces, though it leaves holders of the more than US$700mil term loan due in 2029 at the bottom of the debt pile if they don’t participate.

Messages left with Del Monte were not returned, while company adviser PJT Partners declined to comment.

The reconfigured capital structure will be tied to the newly formed Del Monte Foods Corp II Inc, said the people.

Under the plan, lenders to the canned food producer will provide a US$240mil first-out term loan that matures in 2028.

The new loan has a proposed interest rate of 800 basis points over the Secured Overnight Financing Rate, and participation will be open to all lenders, they said.

Lenders who negotiated the deal will receive better terms and can swap their existing holdings into a second-out loan at par. Non-negotiating lenders who provide new money can exchange up to 30.5% of their holdings at par into the second-out loan.

The interest rate on the paper is 425 basis points over the benchmark, they said.

Lenders who opt not to provide financing can swap into a third-out loan that pays interest in cash and in-kind, they added.

Del Monte’s existing debt fell in response to the news. Brokers quoted its non-ad hoc term loan at around 45 cents on the US dollar, said other people.

The loan had been quoted at around 75 cents on the US dollar last week, according to data compiled by Bloomberg.

Brokers quoted the new second-out loan at around 60 US cents and the third-out at roughly 35 US cents, the same people said.

The deal also calls for Del Monte’s parent to make a contribution of US$30mil by Aug 31.

If the parent company fails to come up with cash by then, the money - which now sits in escrow - will be converted into first-out debt. The interest rate will rise by 50 basis points monthly, but is capped at 300 basis points of payment in-kind interest.

 - Bloomberg