Amid declining sales in the packaged fruit and vegetable categories and a growth strategy viewed as risky, the credit rating of Del Monte Foods, Inc. has been cut to Caa1 from B3 by Moody’s Investors Service.

Moody’s has maintained a negative outlook for Del Monte. Debt obligations rated in the Caa family by Moody’s are “judged to be speculative of poor standing and are subject to very high credit risk.”

Moody’s said the downgrade was prompted by further deterioration of Del Monte’s operating performance due to accelerating declines in the packaged fruits and vegetable category. These losses have swallowed up the benefits of Del Monte share gains in vegetables and exacerbated the effects of the company’s share losses in packaged fruit.

“Del Monte now expects to report $115 million to $125 million of EBITDA this fiscal year ending in April, which is below our previous rating tolerance level of at least $135 million and well below its original budget of $140 million to $150 million,” said Brian Weddington, Moody’s senior credit officer.

The financial woes likely will leave Del Monte’s debt to EBITDA ratio about 9.0 times for the current fiscal year.

“This high financial leverage could become unsustainable if the company is unable to significantly improve profitability over the next 12 to 18 months,” Moody’s said. “The company plans to address these challenges through a shift in its multi-year operating strategy focused on improving sales mix and investing in new innovation to reinvigorate category demand. The senior management team plans to unveil details of the new strategy this June.”

Mr. Weddington predicted the negative volume trends in fruits and vegetables are likely to persist for the next one to two years, necessitating the aggressive action by Del Monte to stabilize its business.

On the plus side, improved inventory controls put in place by management should reduce working capital needs, Moody’s said. This move, in turn, should leave Del Monte with sufficient liquidity over the next year and even allow for the retirement of some debt. On the other hand, the looming multi-year growth initiative may not allow the company to reduce much debt. If the sales volume decline accelerates further, the company’s liquidity situation could deteriorate, likely leading to another rating downgrade, Moody’s said.

Affected by the downgrade includes a $690 million first-lien senior secured term loan due in 2021. Downgraded to Caa3 from Caa2 was a $260 million second-lien senior secured loan due in 2021.

Offering further rationale for the rating, Moody’s said Del Monte has high financial leverage but that the credit profile is supported by the strength of the Del Monte brand.

To achieve an upgrade, Del Monte would need to, among other financial objectives, reduce debt to EBITDA ratio below 8.0 times.

based in Walnut Creek, Calif., Del Monte Foods, Inc. is a marketer of branded and private label food products for the retail market in the United States and South America. Its brands include Del Monte in shelf stable fruit, vegetable and tomatoes; Contadina in tomato-based products; College Inn in broth products; and S&W in shelf stable fruit, vegetable and tomato products. The company’s annual sales total about $1.7 billion.

Del Monte has been owned since February 2014 by Del Monte Pacific Ltd., which is 67%-owned by NutriAsia Pacific Ltd. and Bluebell Group Holdings Ltd.  Both entities are owned by the NutriAsia Group of companies which is majority-owned by the Campos family of the Philippines. None of the businesses are affiliated with other Del Monte companies, including Del Monte Corp. or Fresh Del Monte Produce.