Fleming firms on store sales, Conoco contract; lodging sector better

By Paul Deckelman and Paul A. Harris

New York, Feb. 18 - Fleming Companies Inc. bonds were being quoted several points higher Tuesday after the grocery products wholesaler announced that it had sold some more of its underperforming retail stores and had inked a supply contract for some of gasoline retailer Conoco Phillips' convenience stores. Also on the upside, lodging sector bonds - which have been beaten down over the past several weeks - were showing some strength.

In the primary sector, the only news event came from FastenTech, Inc., postponed its planned new issue.

As the market came back from the three day Presidents' Day holiday break - which saw an early pre-holiday close (2 p.m. ET) on Friday and a complete closure of the nation's financial markets on Monday, activity was lighter than expected, owing to the blizzard that socked the East Coast over the weekend, leaving New York and other business centers still digging out from snow drifts as high as two feet - or more - in some places.

Against that backdrop, Fleming's bonds and shares were better, with the company's 10 1/8% senior notes due 2008 moving up to 65.5 bid from prior levels around 61, and its 10 5/8% senior notes due 2007 firming to 36 bid/37 offered from 32 bid/34 offered.

Fleming's shares were up 35 cents (12.50%) at $3.15 on New York Stock Exchange volume of 1.6 million, heavier than the usual turnover of about a million shares a session.

Fleming announced that it had inked a deal to begin supplying packaged grocery items and other products to 114 ConocoPhillips branded convenience stores in five states, this in addition to some 700 other company-owned convenience stores that Fleming already supplies. The Dallas-based grocery products wholesaler also provides third-party operations for more than 500 outlets of ConocoPhillips' Circle K brand convenience store chain.

Fleming estimates the additional ConocoPhillips business is worth about $35 million in annual revenue.

A trader who saw the bonds rise opined that he didn't know how much of the rise was related to the news, since "$35 million is not such a big deal" for Fleming, which recently reported full-year 2002 sales from continuing operations of $15.5 billion.

Still, he noted that "its bonds have been beaten down so much that any news will pop them up a little. "

Fleming recently announced the termination of its multi-billion-dollar supply contract with its biggest individual customer, the bankrupt Kmart Corp. discount retailing chain, which caused its bonds and shares to slide badly. With Kmart in bankruptcy for more than a year, Fleming - the nation's Number-1 wholesale grocery supplier - has been diversifying its client base, and now supplies product to over 50,000 retail outlets nationwide, including convenience store chains like ConocoPhillips and Circle K, and supermarket operators.

It has also been looking to get out from under its own money-losing company-owned supermarkets, and separately announced Tuesday that it had completed the sale of 17 of its Food4Less locations to Save Mart Supermarkets, for cash proceeds of approximately $82 million, of which approximately $9 million was received in the fourth quarter of 2002.

Fleming said that it intends to apply the cash proceeds from the transaction to reduce its senior secured term loan balance. The transaction also reduces Fleming's capital lease obligations by approximately $20 million.

Elsewhere, some strength was seen in the bonds of lodging companies, such as John Q. Hammons Hotels, whose 8 7/8% notes due 2012 were quoted nearly two points better, at 97 bid, while FelCor Lodging LP's 9½% notes due 2008 were seen at 91 bid, up 2.5 points. Host Marriott's 7 7/8% notes due 2005 were about a point better, at 96.5 bid.

The lodging sector had been taking its lumps in recent weeks, after such industry giants as Hilton and Starwood projected lower first-quarter and 2003 earnings guidance and smaller operators and REITS such as FelCor weighed in with disappointing earnings.

But Bank of America Securities - even while noting the 1.74% fall in the sector's bonds last week - opined Tuesday that the drop had probably been "overdone."

While maintaining its "underweight" recommendation on the lodging firms, based on its expectation of continued pricing pressure in the context of high financial and operating leverage, B of A also noted that "with the senior bonds of most lodging companies now yielding 10%-14%, we expect a trading bounce. Generally speaking, we note that lodging companies have considerable financial flexibility" with which to pay fixed charges, such as excess cash, undrawn revolving credit availability and the ability to sell or mortgage assets. Accordingly, the bank's analysts asserted, "in our view, the Lodging sector's dramatic 44 bp spread widening last week was not warranted, even in the context of weakening sector fundamentals and an orange alert. "

A trader saw Level 3 Communications Inc.'s benchmark 9 1/8% senior notes due 2008 having firmed to 67 bid/69 offered from an opening at 66, but saw little movement in Charter Communications Holdings LP's 8 5/8% notes due 2009, anchored at 44.5 bid/45.5 offered. Also holding steady, he said, were such names as Nortel Networks Corp.'s 6 1/8% notes due 2006, at 86.5 bid/88.5 offered, and its bonds due this Sept. 1, at 99.5 bid/100.5 offered. "Nothing was happening there."

Well after the market closed for the day, the Brampton, Ont. -based telecommunications equipment maker announced it had been awarded a $15 million contract by China Netcom to deploy a national multiservice backbone network.

The trader did see some movement in CMS Energy Corp. bonds - which got pushed around last week amid overall weakness in the utility and merchant energy generation sector.

"They were up a little stronger, with the Dearborn, Mich.-based power producer's 6¾% notes due 2004 firming to 87 bid/90 offered from 85 bid/89 offered previously, and its 9 7/8% notes due 2007 rising to 83 bids/84 offered from 80 bid.

A market source quoted XM Satellite Radio's zero-coupon/14% notes due 2009 unchanged at 38 bid, while Sirius Radio's 15% notes were likewise seen unmoved somewhere in the 50-55 range, even as the shares of the two fledgling satellite radio broadcast operators jumped 19% and 24% , respectively, Tuesday, sent into orbit by favorable comments in a weekend piece in Barron's.

L-3 Communications Holdings Inc.'s shares fell as much as 11% intra-day after Banc of America Securities said the military equipment maker will likely sell fewer bomb detection systems than it had forecast, and the stock ended down $1.85 (4.72%).

But the market source said "we saw the news - but the bonds didn't move at all," with L-3's 8½% notes due 2008 , 8% notes due 2008 and 7 5/8% notes due 2012 all unchanged at 104.5.

Meanwhile the high-yield primary market took something of a snow day on Tuesday, sources said.

FastenTech postponed its offering of $175 million of eight-year senior subordinated notes (B3/B-) due to market conditions, a syndicate source told Prospect News on Tuesday.

Proceeds from the Rule 144A deal, via JP Morgan and Lehman Brothers, were to be used by the Minneapolis fastener company to repay debt and settle interest rate swaps.

Official price talk of 11¼%-11½% had been heard on Feb. 12, however one market source said Tuesday that talk on the deal had been heard as wide as 12½%-13%.

Asked if the dramatic widening signaled some backup in high yield, this source suggested that FastenTech's difficulties might have been specific to the credit, as the company attempts to operate in the sluggish U.S. economy.

Another sell-side source, however, told Prospect News that the market might be suffering as much from indigestion as it is from inclement weather.

"I think the Crown Cork deal last week took a lot of energy out of the whole market," the source commented of Crown Cork & Seal Co.'s pricing Feb. 11 of a $2.4 billion three-tranche deal, the biggest deal to price in the high yield primary since Lyondell Chemical Co. transacted $2.4 billion (also in three tranches) in May 1999.

"I think the market is still digesting that paper," the sell-sider added.

The source also suggested that a good deal of buy-side attention is now focused on the big deals still in the market, in particular DirecTV Holdings LLC's $1.4 billion of 10-year senior subordinated notes (B), coming from joint bookrunners Deutsche Bank Securities Inc., Banc of America Securities, Credit Suisse First Boston, Goldman Sachs & Co. and Salomon Smith Barney.

Sources from both the buy- and sell-sides have told Prospect News that the DirecTV deal, which is presently roadshowing and is set to price during the week of Feb. 24, would receive attention because of the liquidity that its size represents and because of the possibility put forth by Standard & Poor's that its rating could go up if DirecTV, or parent Hughes Electronics Corp., were acquired by a higher-rated company, as some anticipate.

In the interim the new issuance forward calendar has four offerings slated to price during the holiday- and snow-shortened week of Feb. 17.

Old Evangeline Downs LLC's $110 million of seven-year senior secured notes (B-) via Jefferies & Co. is will likely price Wednesday, according to an informed source. No price talk was heard.

Also Citgo Petroleum Corp. is in the market figuring to price $550 million of eight-year senior notes (B+) via bookrunner Credit Suisse First Boston during the present week. Terms on that deal were originally expected to emerge late in the week of Feb. 10. More recently sources close to the deal advised Prospect News to watch for the Citgo terms on Wednesday.

In addition, during the week of Feb. 17 Doane Pet Care is expected to price $200 million of seven-year senior notes (B2/B-) via Credit Suisse First Boston and JP Morgan.

And Russian natural gas producer and exporter OAO Gazprom is in the market with an even $1 billion of 10-year bullets via Dresdner Kleinwort Wasserstein and Morgan Stanley.

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