Hovis bread maker Premier Foods has cut its dividend and taken an extra borrowing facility to help it cope with rising debt payments and soaring wheat prices.

The company, which also makes Mr Kipling cake and Branston Pickle, owed £1.6 billion. It has been hit by significant food price inflation pushing up its costs.

Premier has reported a £73.5 million pre-tax loss for 2007, compared with a £59 million profit the year before.

Shareholders will see the total dividend for 2007 reduced to 6.5p, nearly half that paid in 2006.

It has also negotiated an extra £125 million of working capital for this year.

Chief executive Robert Schofield said: 'Given the high level of input cost inflation in 2007 and the potential for further inflationary pressures in 2008, we consider that it is prudent to increase the financial headroom available to us to ensure that our investment programmes can proceed to plan.'

Premier's debt pile was primarily caused by the £1.2 billion acquisition of Mr Kipling and Hovis firm RHM last year, and its £450 million deal for the UK arm of Oxo and Homepride company Campbell's Soup in 2006.

It paid nearly £150 million in interest last year, compared with £41.5 million in 2006.

The company has bemoaned problems with its Hovis White brand, which 'was not competing effectively' due to taste and quality concerns, the group said. A new recipe has been introduced as a pilot.

Wheat prices have quadrupled over the past year on worries that global supply will not satisfy growing demand.

Despite the wealth of bad news, shares in Premier Foods jumped by 12% to 103.25p. The City hadn't expected a final dividend to be paid, and welcomed the 2.2p per share payout – regardless of it being much lower than the previous year.

The company's share price has also been under considerable pressure in the weeks preceding the results, on speculation that it would conduct a rights issue to avoid breaking its banking limits.

Net debt is £73 million lower than market estimations and the company's bankers still appear to be supportive of the business. 'Premier's situation looks a bit less parlous,' said Investec analyst Martin Deboo. 'We still view Premier as a company in crisis, but are materially reassured by both the year-end financing position and the steps taken to destress the company's financing going forward.'