Fleming flails as Ahold keeps slipping; DirecTV mega-deal prices, J.C. Penney sharply upsized

By Paul Deckelman and Paul A. Harris

New York, Feb. 25 - Fleming Companies Inc. bonds and shares were once again sliding on Tuesday, as the grocery distribution giant announced further operations cuts and an associated hefty earnings charge, and said that the Securities and Exchange Commission had upgraded its heretofore informal inquiry into the company's accounting to a formal investigation. In that same sector, Dutch supermarket operator Royal Ahold NV's bonds and shares - down severely in Monday's trading - got bagged for a second consecutive session.

In the primary market, satellite broadcaster DirecTV became the sixth issuer so far this year to bring an offering of more than a billion dollars, while retailer J.C. Penney Corp. tapped the till for an upsized $600 million split-rated deal, generating some interest among high-yield buyers, sources said.

Away from DirecTV the week of February 24 is shaping up to be energy week in high yield new issues, as Oklahoma City independent natural gas producer Chesapeake Energy Corp. announced plans to price $300 million of 10-year notes by Friday - the fourth oil and gas credit to so position itself.

DirecTV's $1.4 billion of new 10-year senior subordinated notes (B1/B) priced Tuesday at par to yield 8 3/8%, in the middle of the 8¼%-8½% price talk, via joint bookrunners Deutsche Bank Securities Inc., Banc of America Securities, Credit Suisse First Boston, Goldman Sachs & Co. and Salomon Smith Barney.

One market source told Prospect News shortly before terms on DirecTV emerged that the buy-side's expectation that a substantial portion of DirecTV equity could eventually be owned by a higher-rated entity, taken in conjunction with the perception that DirecTV is a core holding of Hughes Electronics Corp., would likely result in substantial interest in the deal. Others in the market have pointed out that the liquidity implicit in a deal the size of DirecTV tends to command a lot of buy-side attention.

The DirecTV transaction clears the forward calendar of the large mega-deals that have inhabited it since the beginning of the year, including Crown Cork & Seal Co.'s $2.05 billion, TRW Automotive's $1.575 billion, Georgia-Pacific Corp.'s $1.5 billion and Houghton Mifflin Co.'s $1 billion - plus OAO Gazprom's $1.75 billion.

A sell-side source recently told Prospect News that while circumstances might bring large transactions unexpectedly to the high-yield new issuance market, no billion dollar-plus offerings currently appear on the horizon.

Terms also emerged Tuesday on a substantially upsized deal from J.C. Penney. The Plano, Texas-based retailer priced $600 million of 8% seven-year senior notes (Ba3/BBB-) at 99.342 to yield 8 1/8%, at the tight end of the 8 1/8%-8 3/8% price talk. The offering was increased from $350 million.

Credit Suisse First Boston and JP Morgan were joint bookrunners on the off-the-shelf deal.

One syndicate source advised Prospect News that "crossover names" drove the J.C. Penney transaction, which traded off the high-grade desk. However, the source added, the deal did generate some play among high yield accounts.

One new deal came onto the new issuance calendar on Tuesday: Chesapeake Energy announced it expects to price $300 million of 10-year senior notes by the end of the week. Salomon Smith Barney, Credit Suisse First Boston and Bear Stearns & Co. are joint bookrunners.

One sell-side source advised Prospect News that Chesapeake's new notes are expected to come in the 7%-7½% range, while the $200 million of convertible preferred stock that it is bringing concurrently figure to come in the 6¼%-6¾% range.

The quick-to-market Chesapeake transaction, which will be used to finance the acquisition of natural gas properties from El Paso Corp., became the fourth energy-related credit to come aboard the forward calendar as business to be completed during the week of February 24.

Late Monday the market heard that two El Paso subsidiaries, Southern Natural Gas Co. and ANR Pipeline Co., would also bring a combined $700 million of seven-year paper (B1/B+) in quick-to-market transactions, both via joint bookrunners Salomon Smith Barney and Credit Suisse First Boston, along with co-managers ABN Amro, BNP Paribas and JP Morgan. Both offerings, $400 million from Southern Natural Gas and $300 million from ANR Pipeline, like Chesapeake, figure to price by week's end.

In addition Northwest Pipeline Corp., a subsidiary of The Williams Companies, Inc., intends to price $150 million of seven-year senior notes (B+/ /BB-) by the end of the week of February 24. Lehman Brothers is the bookrunner on that Rule 144A deal.

Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News on Tuesday that present circumstances favor some of the deals from oil and gas credits.

"It's certainly a good time for companies that have oil and gas reserves to be selling them because obviously commodity prices are high," Difley commented. "You have some sellers, particularly some of the pipeline companies that have oil and gas assets, that need to sell to reduce debt. You could see quite a few of these types of transactions this year."

Prospect News asked Difley if the recent trend of cash moving out of high-yield mutual funds, including the most recent outflow of $140.721 for the week ending Feb. 19, has appreciably altered the cash position of the buy side.

Stipulating that at present the high yield remains a seller's market, Difley said the buy-side is probably still sitting on cash.

"Not enough has come out to make a big dent," he said.

When the new DirecTV bonds were freed for secondary dealings, they "performed pretty well," a trader said, moving as high as 102.25 bid from their par issue price, before coming off that peak level to end with a still-impressive gain to 101.75 bid/102 offered.

Back among the already established issues, Fleming - whose bonds had gyrated lower earlier this month after the Dallas-based Number-one wholesale distributor of grocery products announced the end of its big supply deal with Kmart Corp. - was once again heading lower on Tuesday, after it announced that it would cut 1,800 jobs, end operations in several locations, mostly connected with its Kmart business, and take a $290 million pre-tax charge connected with its cost reductions. The 1,800 positions being cut represents about 15% of the company workforce.

Fleming additionally said that the SEC had upgraded the informal investigation, which had begun in November, into a formal probe. The Commission is looking into the company's vendor trade practices, its accounting for drop-ship sales transactions, the presentation of earnings, and its calculation of same-store sales.

Upgrading the inquiry allows the probers subpoena power, something they do not have in an informal investigation. Fleming said it would cooperate fully with the SEC, and announced that it had hired PriceWaterhouseCoopers to assist in its own investigation.

The upshot was that Fleming paper was "down big-time," a distressed-debt trader opined, estimating that the bonds may have dropped as much as 10 points in Tuesday's trading, on top of some lesser weakness seen Monday.

Another trader said all of this was "not good" for Fleming bonds, quoting the company's 10 1/8% senior notes due 2008 as having fallen to 61 bid/62 offered from prior levels at 69 bid/70 offered, while its 10 5/8% subordinated notes due 2007 dropped to 33 bid/34 offered from 40 bid/41 offered.

Another trader declared "the news came out - and they went down," pegging the subordinated paper as low as 31 bid/33 offered.

Equity investors were just as appalled as the bondholders' Fleming's New York Stock Exchange-traded shares nosedived $1.12 (37.71%) to end at $1.85 on volume of 5.89 million shares, nearly six times the norm.

While the leading U.S. grocery distributor was struggling, international supermarket operator Ahold was continuing to reel for a second straight session following disclosures of accounting irregularities at its U.S. Foodservice unit, which led to the resignation of the company's chief executive officer and chief financial officer.

Ahold, which operates the Stop N Shop and Giant supermarket chains in the U.S. in addition to its international holdings, "was lower again today," said the distressed-debt trader, quoting its intermediate-maturity debt, which on Monday had fallen more than 30 points from above par into the mid-70s, as having backpedaled a few more points, down into the upper 60s.

Another trader saw the company's 8¼% notes due 2010 dropping to 69 bid/71 offered from 75 bid/76 offered Monday.

At another desk, Ahold's 6 7/8% notes due 2029, which on Monday had fallen nearly 30 points to 66 bid, were quoted offered at 60.5. "They're all offered without bids," a trader said of the company's bonds.

Ahold shares, meantime, which were down more than 61% in Monday's dealings, lost an additional 72 cents (17.31%) on Tuesday to close at $3.44 on NYSE volume of 18.8 million shares - over 41 times the average volume of around 457, 000.

Elsewhere, El Paso Corp. - whose bonds and shares were being beaten down just scant few weeks ago - continued to please investors Tuesday with favorable news and posted handsome gains for a second straight session.

Its stock jumped 45 cents (9.89%) to an even $5 on NYSE turnover of 17.1 million shares, more than the usual 11 million. Its bonds - which had pushed up as much as four points in Monday's dealings, on news that the Houston-based energy company would sell oil and gas reserves in two deals valued at $530 million - were up again Tuesday, although, they came considerably off their day's-best levels by the end of trading.

"El Paso was strong on the news of the bond issue," a trader said, as well as the companion announcement that the company had lined up a loan commitment of $1 billion from Salomon Smith Barney and Credit Suisse First Boston, which it will use to pay off approximately $825 million of Trinity River financing connected to a series of companies born as off-balance sheet partnerships used to finance capital projects and other assets.

The prospect that El Paso might be able to clean up its balance sheet and, with the Trinity River debt paid off, be able to access the cash flow of those projects, gave the bonds a strong boost out of the gate, with El Paso's 7 5/8% notes due 2011 pushing as high as 77 bid/78 offered from Monday's levels at 68.5 bid/69.5 offered. After that initial surge, however, the notes "fell off" to end around 71.5 bid/73.5 offered, "up three points on the day, but five off the high," the trader said.

He saw El Paso's strength helping the power generation and merchant energy sector, with Calpine Corp. debt up half a point, AES Corp. bonds a point better and Dynegy Inc. "still well bid for."

At another desk, a trader said that he had heard Allegheny Energy Inc. bonds were firmer after the Hagerstown, Md.-based electric utility company hammered out a $2.4 billion financing package with its lenders that will keep the company out of Chapter 11, but he had no firm quotes.

Chesapeake Energy - which announced plans to issue $300 million of new debt, as well as equity and convertible securities to fund its $500 million purchase of gas reserves from El Paso - continued to hover above par, its 8 1/8% notes due 2011 quoted in the 103.5-104.5 bid area. Standard & Poor's confirmed the company's current ratings and put them on Credit Watch with positive implications, noting that much of the reserve purchase deal would be funded with proceeds from the equity and convertible sales, and the fact that the new debt would improve the Oklahoma City-based energy producer's financial flexibility by extending its debt maturity profile.

S&P further said that -Chesapeake "s acquiring properties with low cost structures in its core Mid-Continent operating area that have a high degree of overlap with Chesapeake's operations, which should provide cost-reduction opportunities."

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