Fleming flounders on, El Paso up on accord; junk funds see up $881.6 million inflow

By Paul Deckelman, Paul A. Harris and Carlise Newman

New York, March 20 - Fleming Companies Inc. bonds continued to falter Thursday as bankruptcy buzz about the troubled grocery products distributor continued to get louder. On the upside, El Paso Corp. debt firmed smartly on news that the energy producer and pipeline operator had reached a tentative settlement with California authorities and other parties to lawsuits alleging that the company had manipulated natural gas prices during the state's energy crunch two years ago.

In the primary arena, United Industries Corp. was heard to have brought a quickly shopped, upsized $85 million add-on offering to market. But the small deal hardly made even a small dent in the big pile of cash which has built up in the hands of investors in recent weeks - and which continues to grow. Market participants familiar with the weekly fund flow numbers compiled by AMG Data Services Inc. of Arcata, Calif. told Prospect News that in the week ended Wednesday, high yield mutual funds - a key barometer of overall junk market liquidity trends - saw a net inflow of $881.6 million.

It was the fourth consecutive week of strong inflows, including two separate weeks in which over a billion dollars more came into the junk funds than left them, counting only those funds which report on a weekly basis and excluding distributions. In the previous week, ended on March 12, net inflows to the funds had totaled $638.952 million.

Over the four-week liquidity surge, fund inflows have totaled approximately$4.389 billion, according to a Prospect News analysis of the AMG figures.

Inflows to the junk funds have now been seen in seven out of the 11 weeks since the beginning of the year, and the year-to-date cumulative inflow total has grown to approximately $5.967 billion from $5.085 billion the week before, according to the Prospect News analysis of the data.

The strong liquidity surge - which dates back to around mid-October, with inflows seen in most weeks, interrupted now and again by a week or so of net outflows - has been credited by analysts as the main catalyst behind both the revival since mid-October of the previously quiet new-issue market and the sharp rebound seen in the previously depressed secondary arena.

Back in trading activity, Fleming bonds were once again in retreat, as the Lewisville, Tex.-based wholesale grocery products distributor - the nation's largest - appeared to be edging ever closer to a possible bankruptcy filing in the view of some investors and other market participants. They note that Fleming has an $18 million interest payment coming due on April 1 on its 10 1/8% senior notes due 2003.

More importantly, Fleming's vendors - the companies which sell it the food, beverage, paper goods and other non-food items which it in turn distributes to its client grocery stores, supermarkets and convenience outlets - are said to be getting nervous about the company's deteriorating financial performance and liquidity situation, and may consider demanding to be paid more quickly - exactly what the beleaguered company doesn't need right now.

Fleming's bond movements Thursday were termed by a trader to be "sloppy," with its 10 1/8% senior notes seen down a point at 37 bid/38 offered, and its 10 5/8% subordinated notes also off a point, at 13 bid/14 offered. Fleming's New York Stock Exchange-listed shares were down five cents (3.94%) to $1.22 Thursday, on volume of 3.3 million shares, about double the norm.

Fleming's bonds and shares have been on a downward spiral for weeks now, as the company has wrestled with a big debt load, revelations of accounting irregularities, the loss of a big contract with its largest single customer, the bankrupt Kmart Corp., a formal investigation by the Securities and Exchange Commission, and the drag on its earnings from its money-losing retail supermarket operation, which is in the process of slowly being sold.

It got some more bad news late Wednesday as Standard & Poor's slashed the ratings on its senior notes to Caa2 from Ba and on its subordinated notes to Ca from B3 - credit downgrades which came as "no surprise," the trader said.

S&P noted that Fleming "is in negotiations to either revise its existing bank loan agreement or obtain a new facility to focus on asset-based measures for financial covenants." Ratings agency analyst Mary Lou Burde cautioned in her downgrade message that "although the banks are well secured, lending support to prospects for an amended or new loan, to date the company has not had success in obtaining the banks' cooperation."

Given the company's many troubles, particularly with its increasingly antsy vendor community, "we think that a bankruptcy scenario is the most likely scenario at this point," said Andrew Ebersole, a bond analyst with KDP Investment Advisors Inc. He said that while his firm has assumed for modeling purposes that such a filing would likely happen around the middle of the year, it could come much sooner, - perhaps as early as the April 1 interest payment date. "It could really happen at any time."

Ebersole said that if - or when - it finally comes time for Fleming to go into Chapter 11, he doubts that it would be a neat little pre-packaged filing. "If they go, the trigger is going to be that the vendors are going to become so anxious that they're going to start restricting terms or just requiring cash for any shipments that they make to Fleming, and once that happens, the company will have to take extraordinary steps to show that it has the financial flexibility to keep up to date on any of their vendor payables."

In a situation like that, the analyst said "with a retailer, a pre-packaged bankruptcy is difficult, because they're at the mercy of the vendors - and once the vendors turn off the spigot, the company has no choice but to file, because then the company can use the DIP (debtor-in-possession) facility to support the vendors going forward.

"The vendors don't want to be continuing to provide [Fleming] with terms and to say 'here's your goods, pay me in 30 days' if they think the company is going to file. So at any given point, the vendors have to make a decision - to continuing invoicing Fleming, or to stop shipping and demand cash. Once they determine to withhold or restrict terms, Fleming will find they're not going to have the liquidity support - and then the bankruptcy happens."

Ebersole said that Fleming has many troubles, even without the loss of the Kmart contract, which he described as a grandiose plan to realize better economies of scale which never materialized. They invested a lot of capital and resources" but never were able to reap the benefits, he said. In the meantime, Fleming was also suffering weakness in its core distribution operations, which supply supermarkets with product, especially as the mostly smaller-sized supermarket chains which Fleming supplies have come under increasing pressure from Wal-Mart Corp. and other large operators.

Ebersole said that with the subordinated bonds already trading down in the teens and the likelihood of only a very small return, if any in the event of a restructuring, they represent a greater risk that he would counsel investors stay away from.

On the other hand, given the prospect that senior debt holders would get a more substantial equity stake in the reorganized Fleming, "if you assume there will be no more [revelations of] accounting fraud, at this price, the senior notes look interesting."

On the upside, El Paso Corp. bonds and shares were up solidly Thursday on news of the tentative California settlement. The Houston-based energy producer and pipeline company's 7 7/8% notes due 2012 jumped four points, to 79.5 bid/80.5 offered.

The new El Paso Energy Partners LP 8½% senior subordinated notes due 2010, which priced at par on Wednesday, were heard little changed, at par bid/1002.5 offered. El Paso Energy Partners is part owned by El Paso Corp. and closely linked although the companies have been making efforts to increase the separation recently.

El Paso shares zoomed 90 cents (16.36%) on the NYSE to $6.40, on volume of 34.5 million shares, over three times the usual.

While the company was reported to have agreed to pay a total of $1.7 billion to California, several other Western states and certain private parties in exchange for the dropping of their lawsuits, news reports said the bulk of the settlement - about $1 billion - would consist of discounts in natural gas prices to be given out to certain California customers over the next 20 years, which much of the remaining $700 million in cash payments would also be spaced out over that 20 year period, so the impact on any given year's bottom line would be relatively small.

Also on the energy front, CMS Energy Corp.'s 7 5/8% notes due 2004 and 9 7/8% notes due 2007 ended Thursday each up a point-and-a-half, at 89.5 bid and 87.5 bid, respectively.

With U.S. forces breaching the borders of Iraq amid reports of strategic air strikes against targets in Baghdad and elsewhere, high-yield primary market sources reported a generally quiet session on Thursday.

One quick-to-market deal, an upsized $85 million add-on from United Industries priced at 101.5 during the session.

"It's been very quiet that last two days," one sell-side official told Prospect News shortly after the close of Thursday's session, adding that nothing had been announced during the session and therefore nothing added to the forward calendar.

"The accounts were focused on the calendar and now that the calendar has started to clear up people seem to be in no hurry to make decisions," the source added. "They're sitting on the sidelines watching."

Another official from another sell-side institution also expressed the belief that throughout high-yield players would logically stand by to see what progress U.S. armed forces would make in the effort to displace Iraqi dictator Saddam Hussein.

Yet another capital markets source told Prospect News Thursday that the mere fact that American forces are on the move has registered in a positive way in the financial markets.

"It was beneficial to the equity market and we're kind of seeing the same thing here in fixed income," the source said.

"Look at the impact on oil prices alone," the official added. "Oil was as high as $38 a barrel on March 12. It's now down to $28.70 a barrel. It's been steadily declining, day over day.

"I see the same thing happening in the equity markets and the bond markets. People are hoping for a quick resolution to the war to get it behind us and work on recovery."

During Thursday's primary market session, United Industries priced an upsized $85 million add-on to its 9 7/8% senior subordinated notes due April 1, 2009 (B3/B-) at 101.5 for a yield to worst of 9.417%. The St. Louis pesticide and fertilizer firm's deal via joint bookrunners Banc of America Securities and CIBC World Markets priced right on top of the 101.5 area price talk. It was increased from the announced amount of $75 million.

One source close to the deal said that for a standard drive-by add-on it went very well, adding that the bookrunners went out with it at 8:15 a.m. ET, issued price talk at 10:30, held an investor conference call at 1:00, and priced the deal at 4:30.

"There was a lot of interest," the source said. "It was comfortably three times oversubscribed.

"There's a lot of cash to be put to work."

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