Fleming bonds jump again on planned unit sale news; El Paso bounces

By Paul Deckelman and Paul A. Harris

New York, Sept. 25 - Fleming Cos. bonds bounced for a second consecutive session on Wednesday after the embattled Dallas-based wholesale grocery giant announced plans to sell its money-losing retail stores unit and put the expected proceeds towards debt reduction. Fleming also lowered its outlook for the rest of 2002 and 2003, causing Standard & Poor's to cut its corporate credit rating one notch to BB- and to put its debt on CreditWatch with negative implications, but bond and stock investors alike shrugged off those negatives in favor of accentuating the positive.

Fleming had released a statement on Tuesday evening, after the financial markets had closed, in which it announced its intention of unloading the 110 low-price retail food stores which it operates under the Food 4 Less and Rainbow Foods names. Fleming said that it would focus its attentions on its core wholesale food distribution business, which supplies grocery items to a number of major supermarket chains and to discount retailers such as Kmart Corp., and said it planned to use the anticipated $450 million of after-tax proceeds, plus another $100 million it expects to generate in savings, to cut its approximately $2 billion debt load. Company officials elaborated on the Tuesday night announcement during a Wednesday morning conference call with analysts and investors.

Fleming's battered bonds and shares, which had been on the slide for several weeks under a barrage of bad news on several fronts, were sharply higher in Tuesday's dealings, whether in anticipation of the Tuesday night announcement or just because investors felt that they had been beaten down enough. That bounce continued on Wednesday.

Fleming shares, which on Tuesday had jumped 19.91% in New York Stock Exchange dealings (after having fallen to all-time low intra-day and closing levels in the $4 range the previous day), tacked on another 81 cents (15.64%) on Wednesday, to end at $5.99. Volume of 3.8 million shares was nearly three times the usual.

On the bond side, Fleming - which had risen more than 10 points on Tuesday - "had a big bounce," Wednesday, a trader said. He quoted its 10 1/8% notes due 2008 as having pushed up to 77 bid from opening levels of around 66 bid, while its subordinated 10 5/8% notes due 2007 rose as high as 63 bid from 48 bid at the opening, and its 9 5/8% notes jumped to around 53 bid from around 35 bid previously. "They definitely saw some action," he said. "This was the big one."

During the afternoon, S&P weighed in with its downgrade message, citing lowered expectations for earnings and credit protection measures.

The ratings agency, while noting the company's plans to get out from under its underperforming retail food stores unit and put the proceeds towards debt reduction, warned that the downgrade "reflects uncertainties related to the divestiture of Fleming's retail division, including the timing and amount of asset sale proceeds and the impact of lost wholesale volume. Although application of proceeds for debt reduction is expected to mitigate the impact of lower cash flow, management will be challenged to smoothly manage this process while maintaining focus on executing its core distribution business."

The downgrade sprinkled a little rain on Fleming's upside parade - but not much. The trader said that following the S&P screed, levels on the Fleming bonds came down about two or three points from their earlier peak levels, but the bondholders still went home with hefty gains of around 10 points on their issues for a second straight session.

"In the long run, I see this as a positive for Fleming bondholders," declared George Kirchwey, a high yield analyst for SAMCO Capital Markets in New York. "If indeed Fleming can realize $450 million from the sale of the retail store chains, plus another $100 million from free cash flow, and can reduce debt with that, it totals 25% of their $2.2 billion in debt outstanding. That really ought to lower their interest cost, reduce their leverage and improve their credit profile."

The supermarket industry, of course, is no place for the faint of heart - a number of chains, including such high-yield issuers as Pathmark Stores, Grand Union, Bruno's and Jitney Jungle - have been forced into reorganization in the past few years, as has Kmart, a discounter which also operates as a quasi-supermarket at many of its Big K locations (its stores offer several aisles of packaged foods, plus the same kind of non-food items sold in supermarkets, as well as some refrigerated dairy items). The chains that are holding their own, such as national operators Safeway, Albertson's, Kroger and discount industry king Wal-Mart, do so in a highly competitive, low-margin business, making up in volume what they lack in margin.

Against that backdrop, one might wonder whether Fleming will be able to get the $450 million for its stores that it anticipates, but Kirchwey indicates that there's probably not much cause for concern on that point.

He notes that the company said its $450 million anticipated proceeds figure is based on what it terms "multiple offers" of interest it has already received for the retail division. "Our impression from listening to the presentation and discussions with management is that they are trying to be conservative about what the chains [being sold] will bring."

The SAMCO analyst did express some caution on just when all of these proceeds might be realized and applied to the debt. "I would not expect [the retail division] to be sold and received for cash any time in 2002. I'm looking ahead till sometime next year."

Kirchwey points out that the announcement of the planned sale of the retail stores "is not a surprise," since Fleming had indicated on its second-quarter conference call that the retail stores were "under strategic review, which we took to mean that they were for sale." Once the underperforming operation is jettisoned, he says, Fleming "will be going back to their core competency of being wholesale food distributors and not messing with the retail end of things. And they mentioned that by exiting the retail business, they will not be competing with the retail stores that their wholesale division supplies."

Fleming's largest single customer is Kmart, which filed for Chapter 11 protection from its creditors in January and closed over 240 of its approximately 1,400 stores. While Fleming has taken pains to point out that Kmart is just one customer, albeit a big one, and that it by no means has all of its eggs in the troubled Troy, Mich.-based discounter's basket, concern over whether Kmart will further shrink itself has helped to weigh on Fleming's securities. Kirchwey said that the Kmart question came up during the conference call, with Fleming expecting it to continue during 2003 with its current, lower number of stores. "The big worry was that Kmart would come in even lower [in terms of number of stores remaining open] than projected. They said on the call that they had made a reasonable assumption that Kmart could continue at the present reduced level of business."

Kirchwey opined that even with the recent price recovery over the past two sessions, "there is some room for upside [on the Fleming bonds]. I don't know if we'll see them trading around par, where they used to be, but I still think there's room for improvement, as investors calm down about Fleming and get comfortable with the new outlook for 2002 and 2003 - although obviously that's predicated upon a major debt reduction, made possible by the cash received from the sale of the retail stores, and that's a big 'if'."

Apart from the latest installment of the Fleming saga, market interest seemed to center upon El Paso Corp., whose bonds were going "up, down, backawards and sidewards," a distressed-debt trader quipped. "It was fun. Guys had four or five different opinions about what's the best thing to do with El Paso - but as a trader and a sales operation, it was great because we didn't have to have an opinion. We could just stay in the middle and direct traffic."

He said that El Paso ended better bid on the day, although the paper of its Coastal Energy unit seemed to be "the subsidiary of most favor, while the straight El Paso Corp. paper lagged a little bit and didn't move up nearly as much."

El Paso's nominally investment-grade paper had been getting slammed around at junk bond-like price levels over the previous two sessions after a Federal Energy Regulatory Commission administrative judge ruled that the company - the largest U.S. pipeline operator - had prevented a significant amount of natural gas from reaching the electricity utilities in California during the power crisis there that ran from November, 2000 to around March 2001, thus squeezing the price higher. Judge Curtis Wagner recommended that the company be punished, but did not specify the size of the fines he had in mind. El Paso has criticized Wagner's findings.

The trader said that an accountant familiar with El Paso's finances had advised him that "the worst he could find as far as egregious profiteering by the company was probably around a $200 million number, and it seemed the market was penalizing them for about $3 billion worth of fines, which he thought was extreme."

He noted that "between judiciary action, the FERC and politicians in general, anything is possible, so in this market, [investors] are definitely going to err on the downside of how bad things could be." But he added that with El Paso bonds and shares having been pounded the last several sessions, "a lot of people think that even with the worst of fines the paper is still going to be money good, which is how we think." He reiterated, however, that "people are more comfortable going after the non-California-involved payout paper, that would be less involved with any fine or not involved at all," meaning the Coastal issues.

He quoted Coastal's 7¾% notes due 2010 as having moved up two or three points on Wednesday, to 69 bid/72 offered, while its 7½% notes due 2006 were likewise a trey better, at 71 bid/74 offered. Meantime, El Paso's own 6¾% notes due 2009 held steady around 63 bid/66 offered, while its 7¾% bonds due 2032 were at 60 bid/63 offered, also not much changed, the trader said.

At another desk, however, a market source quoted El Paso's various issues as having bounced around three to four points on Wednesday, with its 7 5/8% notes due 2011 improving to 67 bid and the 73/4s at 63 bid.

El Paso shares - which had gotten slammed on Monday and which were down another 29.43% in Tuesday's dealings, bounced $1.75 (33.02%) to $7.05 Wednesday. NYSE volume of almost 36 million shares was four times the usual.

Pulling news out of the primary market Wednesday became a little like pulling teeth, as commiserating sources on both the buy- and sell-sides advised Prospect News that there were no events to report.

No transactions took place in the primary market, sources said, and no new deals were announced.

"Bear markets make you work hard," Pax World High Yield Fund portfolio manager Diane Keefe commented when Prospect News caught up with her on Wednesday afternoon.

Keefe said that her fund, which submits high-yield credits to a series of social issues screens, had improved 50 basis points from August.

"As of Sept. 24 we were down 3.61% year to date," she said adding that the Lipper High Yield current index was down 7.74%.

Asked about recent plays Keefe told Prospect News that she had reduced what had been an overweight position in Nextel Communications, Inc. paper down to market weight.

The move, she added, was prompted by the resignation of Nextel's chief operating officer James F. Mooney, which was announced on Sept. 19.

"I liked the situation and Nextel had rallied a lot," Keefe said. "I was thinking of swapping out of the 9 3/8%s into the 10.65s because there's a spread there and the 10.65s have gone cash pay.

"But when Mooney resigned it just seemed odd. And I decided not to be overweighted in it anymore."

Describing the $2 billion issue of 9 3/8% Nextel notes as "a benchmark for high yield," Keefe noted that although they had rallied of late and were "a heck of a lot closer to 80 than 60," she made the play in order to insulate the Pax World High Yield Fund from being "overly subjected to swings of the market."

Regarding new issuance, the Pax World High Yield Fund portfolio manager said that while Plains All American Pipeline's upsized $200 million of 10-year senior notes (Ba2/BB) passed the fund's social issues screens and the company looked good, the deal was on the rich side.

"I wanted to play but it was too tight for me," Keefe said of the Houston company's new notes which priced Sept. 18 at a yield of 7.78% via UBS Warburg.

"It's a good company because it's not as subjected to the commodity price-swings," she added. "But it came at 7.78 and it's been trading at a premium, so I think a lot of the high-grade accounts bought it."

Keefe commented that she would have gotten involved had the Plains All American Pipeline paper come at 8%.

Meanwhile on Wednesday, with high-yield primary market observers talking up sizable new acquisition financing deals headed into the market as cash-starved telecoms including Qwest Communications, BCE and Sprint sell off directories assets, Prospect News heard from capital markets sources that substantial new issuance is also likely to emerge from the fast-food sector.

The Burger King Corp. leveraged buyout, sources say, could result in up to $500 million of bonds and $800 million to $900 million of bank debt in October. The equity sponsors are Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners.

JP Morgan and Salomon Smith Barney are said to be the lead banks on both the bank debt and the bonds; however neither of those institutions commented when contacted by telephone on Wednesday.

Finally, with little else to watch all eyes seem trained upon the only deal expected to price during the remainder of the Sept. 23 week, Resource America Inc.'s $125 million of eight-year senior notes (B3/B).

The Philadelphia energy company's Rule 144A offering via Bear Stearns & Co. and Friedman Billings Ramsey is set to wrap up its roadshow Thursday and to price Friday. No price talk had been heard at the conclusion of Wednesday's session.

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