Dec. 1 (Bloomberg) -- Pilgrim’s Pride Corp., the largest U.S. chicken producer, sought bankruptcy protection along with five affiliates after rising grain costs and a poultry surplus led to four consecutive quarterly losses.

The company, a supplier to Wal-Mart Stores Inc. and Yum! Brands Inc.’s KFC restaurants, listed assets of $3.75 billion and debt of $2.72 billion today in U.S. Bankruptcy Court in Ft. Worth, Texas. It said it will seek $450 million in loans arranged by Bank of Montreal for operations during its reorganization.

The filing “was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations and allow for a successful restructuring,” Pilgrim’s Pride Chief Executive Officer Clint Rivers said in a statement.

Surging feed costs and dropping chicken prices helped lead to the collapse of Pilgrim’s Pride, formed in 1946 when Aubrey Pilgrim and a partner, Pat Johns, bought a feed store for $3,500.

The company took on debt and surpassed Tyson Foods Inc. in production in 2007 when it bought Atlanta-based Gold Kist Inc. for $1.1 billion. Since Sept. 26, lenders agreed to waive certain conditions of its credit agreements until today.

The “purchase of Gold Kist was a blow to credit quality which was exacerbated by weaker operating conditions,” Sean Egan, co-founder and president of Haverford, Pennsylvania-based rating company Egan-Jones Group Ltd., said in a note today.

5% Stakes

Investment firms that own at least 5 percent of Pilgrim’s Pride include London-based Prudential Plc unit M&G Investment Management Ltd., Boston-based Wellington Management Co. and Stamford, Connecticut-based SAC Capital Advisors LLC, according to court papers.

Wells Fargo & Co. is the biggest unsecured creditor in the case, with two claims totaling $25.6 million for senior- subordinated notes due in 2015 and 2017, according to the filing. International Paper Co. holds an unsecured claim of $6.08 million.

Pilgrim’s Pride’s debt includes $400 million of unsecured claims and $250 million of subordinated unsecured claims, the company said in bankruptcy documents.

The company, with 47,900 workers in North America, had sales of $8.5 billion in the 12 months ending Sept. 27, according to the filing.

Its pork-breeding operations and two insurance companies are owned by non-bankrupt affiliates. Its operations in Mexico, where it’s the second-largest poultry producer, also aren’t affected by the bankruptcy.

Growers, Chickens

Pilgrim’s asked a judge for permission to pay pre-petition obligations owed to independent contract growers which raise and care for its chickens. The company said it relies on the about 5,500 growers who raise poultry solely for Pilgrim’s.

As of Nov. 24, Pilgrims owed about $19.5 million to the various growers, according to court papers. The growers are in possession of about 238 million chickens.

If the growers “stop caring for the debtors’ chickens, the debtors’ inventories would be diminished for months,” Pilgrim’s said. Without permission to pay growers, the company said, it would need alternative suppliers to meet customer expectations.

Standard & Poor’s Ratings Services cut Pilgrim’s Pride’s credit rating Nov. 6 to D from CC after the company failed to pay $25.7 million in interest due Nov. 3 on its senior notes and senior subordinated notes.

Bets on commodities added to Pilgrim’s losses, rating company Moody’s Corp. said. The company lost $96.9 million on feed-grain derivatives contracts in the fourth quarter ended Sept. 27, bringing the year’s loss to $437.2 million excluding a goodwill impairment and tax valuation allowance, Moody’s said.

Moody’s Downgrading

Moody’s downgraded Pilgrim’s corporate family rating to Ca from Caa1, saying a third deadline for the company to try and cure a default on its bank covenant expired today and a 30-day grace period for payment of bond interest originally due on Nov 3 was about to expire.

Skinless and boneless chicken-breast prices have tumbled 16 percent in this year to $1.115 a pound while leg quarters dropped 25 percent to 31 cents a pound, according to the U.S. Agriculture Department.

Pilgrim’s Pride plunged a record 40 percent on Sept. 25 after the company said it might breach a credit covenant because of a “significant” loss in the quarter ended Sept. 27. On Oct. 30, it fell 21 percent, trading below $1, after research firm CreditSights Inc. said bankruptcy seemed “highly probable.”

Pilgrim’s Pride declined 53 cents today to 62 cents at 11:46 a.m. before trading was halted on the New York Stock Exchange.

New Officer

Pilgrim’s Pride appointed William Snyder as chief restructuring officer on Nov. 10 to reduce costs, develop restructuring plans and improve the company’s liquidity.

The appointment was required by lenders including Colorado- based CoBank ACB and the Bank of Montreal as part of the Oct. 26 waiver-extension agreement.

Pilgrim’s Pride on Nov. 28 said it expects to report a fiscal fourth-quarter loss of $802 million, or $10.83 a share, partly because of an impairment charge from the purchase of Gold Kist Inc.

The company said last week it was unable to file its fourth- quarter results by the Nov. 26 deadline because of discussions with lenders about a temporary credit waiver. The company said it plans to file its results by Dec. 11.

Corn prices soared 66 percent in the first half of the year, partly on demand for food, livestock feed and ethanol. They reached a record $7.9925 a bushel on June 27, and soybean prices climbed to a record $16.3675 a bushel on July 3.

Output Reduced

Pilgrim’s Pride and other chicken producers have been reducing output to boost prices. Since March 5, when Rivers became CEO, he has cut processing capacity by 6.25 percent by either closing and idling plants, cutting 2,635 jobs.

Rivers, 49, also sold the company’s New Oxford, Pennsylvania, turkey-processing plant to Hain Celestial Group Inc., exiting the turkey business.

“The current operating environment is among the most difficult I’ve seen in my 27 years in this business,” Rivers said on a May 5 conference call with analysts. “The federal government has helped spark a growing worldwide food crisis by mandating corn-based ethanol production at the expense of affordable food.”

Rivers succeeded O.B. Goolsby Jr., who died in December 2007 after suffering a stroke.

“It’s an indication of the weak conditions in the chicken sector,” Egan said of the bankruptcy filing. “If you have operating losses, a reduction in the debt burden doesn’t address the underlying problem.”

The case is In re Pilgrim’s Pride Corporation, 08-45664, U.S. Bankruptcy Court, Northern District of Texas (Ft. Worth).

To contact the reporters on this story: Dawn McCarty in Wilmington, Delaware, at dmccarty@bloomberg.net; Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: December 1, 2008 17:28 EST