Last week, when Moody’s put out its bottom rung report—which those in the blog world seem to see as a "dead companies walking" list—Baker & Taylor earned the dubious distinction of being named. That made plenty of vendors nervous.

Even more alarming, Baker & Taylor is a private company that doesn’t file with the U.S. Securities and Exchange Commission, so information on the company is scarce. But looked into the issue to see what’s what.

It turns out that Charlotte, N.C.-based Baker & Taylor made that list based on a Feb. 23 ratings downgrade to B3 from B2 by Moody’s Investors Service analysts Daniel Marx and Kendra M. Smith. Likewise—but unrelated to the bottom-rung list—10 days later, Standard & Poor's Rating Services lowered its corporate credit rating on Baker & Taylor Acquisitions Corp. to 'B-' from 'B'. It also lowered the rating on Baker & Taylor’s $165 million in senior secured notes to 'CCC' from 'CCC+'.

According to the Moody’s report, Baker & Taylor, which was acquired by a Castle Harlan equity fund in May 2006, generated $1.9 billion in sales for the 12-month period ended Dec. 26, 2008. But that’s a run rate since the company’s current fiscal year ends on about June 27 this year. Nevertheless, that run rate is up from the $1.6 billion in annual sales reported by sources at the time of its acquisition.

However, a deteriorating performance in the six month-period ended Dec. 26 concerned the Moody analysts, and apparently led to the downgrade. According to those analysts, Baker & Taylor suffered an 18% sales decrease in that period.

On the plus side, Baker & Taylor has “adequate liquidity” from its revolving credit facility, Marx told According to the Moody’s note, Baker & Taylor has a $425 million asset-based facility due 2012, with $93.3 million in borrowings and $3.3 million in letters of credit; and another $243 million in availability under the formula of inventory assets available to serve as collateral for the loan.

That means that Baker & Taylor’s debt from the notes and the bank totals $261.6 million. If the notes carry, say, 11% in interest, while the revolver carries, say, 7% interest payments, that would put annual debt service at about $26 million.

The Moody’s report didn’t reveal earnings before interest, taxes,
depreciation and amortization. But the Moody’s report did say that EBITA coverage had decreased from 1.3 times it had at its fiscal-year end on June 27, 2008 down to 1.0 on Dec. 26, 2008. While that may look like Moody’s analysts are saying that Baker & Taylor can just about cover interest payments, sources suggest otherwise.

In 2003, the company generated about $42 million in EBITDA when revenue was $1.2 billion; and sources say that EBITDA was in the $65 million-$75 million range by the time of the 2006 acquisition, when revenue was $1.6 billion. If Baker & Taylor at $1.9 billion in sales, kept its EBITDA in line with results from 2003 and 2006, it suggests that Baker & Taylor has a better than 2-1 coverage of EBITDA to annual interest payments.

Baker & Taylor executive VP/CFO Jeff Leonard declines to comment on specific financial results. But he says, “We have plenty of EBITDA, to cover our interest payments." He also adds that the company is doing all the right things, in terms of operating in a low-margin, high-debt environment.

Finally, he adds that he and chairman and CEO Tom Morgan wouldn’t have joined the company last summer if they thought the company was in trouble.

What’s more, Moody’s Marx says the facility is “covenant-light,” which means that Baker & Taylor doesn’t have to worry about tripping most of the financial ratios usually contained as loan provisions of revolving credit facilities. Such ratios often become the bane of a borrower’s existence, especially when triggering financial covenants can force the borrower into technical default.