Chesapeake Corp., a global packaging company, has reported dismal 1Q results which, if continued into the next quarter, could cause it to default on some of its $543 million in debt. Revenues declined seven percent, while earnings plunged from a small profit the same quarter last year to an $8.4 million loss.

"We expected financial results for the first half of the year to be below those in 2007, and the first quarter was worse than expected," said CEO Andrew J. Kohut in a press release yesterday. "The second quarter should be better than the first, and we expect the second half of the year to build on this momentum because of a robust business pipeline and benefits from process improvement initiatives. "

"We have made good progress on refinancing our senior revolving credit facility and have a commitment letter to have a new $250-million senior secured credit facility by the end of June," added Kohut.  "We are also actively exploring options for non-core or underperforming assets."

On March 5, 2008, the company obtained agreement from lenders to amend its senior revolving credit facility.  The amendment permitted the company to increase its debt burden but imposes interest rates to 4.5 percentage points higher than London Interbank Offered rate and imposed restrictions on acquisitions, dispositions and indebtedness. If the facility was not fully refinanced prior to March 31, the company would provide a security interest in its European subsidiaries. States the company: "Activities are currently underway by the lenders under the senior revolving credit facility to obtain security interests in certain of the company's assets, primarily in the U.K. and Ireland. " 

Senior management expects to "avoid compliance issues" with the covenants, but warns "there can be no assurance that these alternatives will be successfully implemented.  Failure to comply with the financial covenants would be an event of default under the senior revolving credit facility."