Harry & David Brings In Turnaround Pro

Troubled food gifts merchant has brought in a turnaround specialist as its new CEO. Kay Hong, a managing director at global turnaround specialist firm Alvarez & Marsal, was appointed chief restructuring officer on Feb. 18, and will also serve as Harry & David's interim CEO.

Steven Heyer, who replaced Bill Williams as Harry & David's CEO last February, will retain his position of chairman with the company.

Hong served as an officer at Spiegel and Movie Gallery and as a financial adviser for Eddie Bauer Holdings, London Fog Group, Lululemon Athletica and the secured lenders of Legacy Estates Group and Oriental Trading Co.

But can Harry & David be turned around at this point? The company is facing an estimated $7 million interest payment on March 1 on its senior unsecured notes, and a substantial scheduled debt maturity in March 2012 when the company's $58 million senior unsecured notes mature.

"We believe that Harry & David's current capital structure is unsustainable and that the company will seek to restructure its balance sheet," Standard & Poor's analyst Mariola Borysiak said in a report. "In our opinion, this could lead to a selective default or a filing for protection under Chapter 11."

According to Standard & Poor's, Harry & David is required by its creditors to repay its revolving credit balances to zero as of Dec. 26 of each year and maintain a minimum cash balance of $50 million as of Dec. 31 each year.

When its fiscal year ended Dec. 25, Harry & David had an estimated $66.9 million of cash and $57.9 million of accounts payable. As a result it can’t borrow under its $105 million revolver, according to Standard & Poor's.

Meanwhile, Moody's Investors Services downgraded Harry & David's credit rating in January, and said in a report that "any restructuring of Harry & David's debt could result in significant impairment to debt holders given the company's negative EBITDA and low tangible asset value relative to its outstanding debt."