Kmart bounces as heads roll at top; Regal Cinemas, Coinmach price deals

By Paul Deckelman and Paul Harris

New York, Jan. 16 - Kmart's depressed bonds saw a bit of a bounce Thursday, as its president was bounced out of the executive suite and a new chairman who successfully turned around one major company was brought in to see if he could help save the struggling retailer as well. In primary market activity, the curtain finally came up on Regal Cinema's new bond deal, and a new issue came down the slot from Coinmach Corp.

Kmart announced that James B. Adamson, up till now a member of the company's board of directors, will assume the post of non-executive chairman, serving as the main liaison between the board and senior management. The chairman's post had heretofore been held by Charles C. "Chuck" Conway, who will, however, remain with the management team in his other capacity, as chief executive officer.

At the same time, the company tersely announced that effective immediately, Conway lieutenant Mark S. Schwartz, who joined Kmart in September 2000 and most recently had been president and chief operating officer "is no longer with the company." The company statement did not elaborate on the circumstances of Schwartz's departure.

Kmart "was very volatile today, up and down," in response to the news developments, a trader declared. He saw the company's benchmark 9 3/8% notes due 2006 as having opened around 50 bid/52 offered, then trading as high as 59 bid during the session before "mostly giving it all back" to end at 51 bid/52.5 offered. Another trader concurred that Kmart paper was "all over the lot today," while yet a third also saw them trade up about five to six points on news of the management shuffle, then lose most of those gains to end up just slightly on the session.

Still, it was the second straight session in which Kmart's hard-hit bonds - recently hammered down as low as the upper 40s from prior levels in the 70s and 80s - managed not to slide precipitously. And for the first time in several sessions, the company's shares - which have lost more than half of their value just since the beginning of the year and which currently trade almost 90% below their 52-week high ($13.35, back in August) - managed to stop hemorrhaging Thursday. After successive sessions which saw its levels successively hammered down with double-digit percentage losses, the shares were down just 5 cents, or 2.50% Thursday, to close at $1.55. New York Stock Exchange volume of 83 million shares was more than seven times its recent average daily turnover.

Adamson is the former chairman, president and CEO of eatery giant Advantica Restaurant Group, Inc., and is widely credited with helping to turn that company's fortunes around several years ago, guiding what was then known as Flagstar Companies Inc. out of bankruptcy. Along the way, he disposed of several underperforming chains, slimming Advantica down to its core Denny's operation and several other nameplates, which are in the process of being sold. Adamson also played a significant role in regaining respectability for Denny's, which back in the late 1990s was beleaguered by a number of claims of racial discrimination.

Given his past experience in dumping unwanted assets to help Advantica get back on its feet, the choice of Adamson to help lead Kmart would thus seem to make sense under a scenario in which the troubled Troy, Mich.-based discount retailing giant would decide to try to avoid the bankruptcy court by belt-tightening. Analysts have estimated that the company would have to close between 200 and 400 of its approximately 2,100 stores for such cost-cutting to be meaningful. On the other hand, Adamson's past bankruptcy experience with Flagstar/Advantica might be the reason why he was brought aboard. Speculation that Kmart might be headed for Chapter 11 has been rife since Prudential Securities equity analyst Wayne Hood raised the dreaded B-word in a research note about two weeks ago in which he cut his estimates for the company and warned that its weak cash-flow generation might not leave it with enough liquidity to run its day-to-day operations, forcing it into a filing.

Adamson certainly will have his work cut out for him, as does continuing CEO Conway, whose efforts to overtake Number-One discounter Wal-Mart Stores Inc. and to hold off hard-charging rival Target Corp. by closing unprofitable stores, converting others to the "Big K" super-store format, lowering prices on 38,000 items and playing the nostalgia card with Kmart's revival (sort of) of its old "Blue Light Special" promotion have so far failed to make much headway.

Of immediate concern is liquidity; Kmart said Thursday that it continues to review its current and prospective liquidity position and business plans for the 2002 and 2003 fiscal years, and is also continuing discussions with its lenders regarding existing and possible supplemental financing facilities. Late in the day, CNBC reported that Kmart was working with its bankers to receive a new line of credit of about $3 billion. The financial news network did not identify its sources, and reported no other information about the talks.

Another concern for the company is the willingness of suppliers to stay on board if it looks like they might have difficulty getting paid or if Kmart's worsening image might hurt their own reputations. The Wall Street Journal reported Wednesday that Kmart's high-profile alliance with Martha Stewart might be endanged in the event of a bankruptcy filing, but Reuters reported Thursday that the titaness of taste's company, Martha Stewart Living Omnimedia, declared that it is not currently looking to back out of its contract with Kmart should the embattled retailer find itself in bankruptcy. The news report also said that Stewart -whose name graces a broad line of housewares, linens and decorative items which acts as a flagship brand for Kmart -has not approached any Kmart rivals about alternative partnerships.

But other, less public suppliers might also be getting restive. The Journal report said that "two factoring companies - firms which in effect, provide critical credit assurances for suppliers - said they told their clients to withhold shipments to Kmart pending a strategic decision by Kmart's board," which met Monday and Tuesday but made no immediate announcements as to possible store closings, or corporate restructurings . It remains to be seen whether Thursday's announcement of the executive changes and the continued talks with the bankers are sufficient to calm the concerns of the factors and their supplier clients.

One of Kmart;'s biggest suppliers is Fleming Cos. Inc.; the Dallas-based wholesale grocery company has a long-term contract to supply Kmart's 2,100 stores with grocery products. Its debt - which has tracked the ups and downs of Kmart's, though at much higher price levels and with far less volatility -was essentially unchanged Thursday, its 10½% notes holding around 91 bid and its 10 5/8% notes at 89.

A trader said the day's activity was "once again a Kmart story, with all eyes focused there." Elsewhere, however, traders saw the new Owens Brockway Glass Container Inc. 8 7/8% senior secured notes due 2009 continuing to hang in around Wednesday's par issue price. Coinmach's new 9% notes due 2010, after having priced at par, were "banging around" slightly higher, last quoted bid around 100.875-101.

Among existing issues, Conseco Inc. paper continued to firm despite Standard & Poor's downgrade Wednesday of the Carmel, Ind.-based insurer's senior debt ratings a notch from B+ to B; market attention seemed more drawn to the company's announcement that since Dec. 6, it had retired another $34 million of bonds set to mature this year. That brought the total amount of Conseco 2002 debt retired early since June 30 to $266 million, or fully 30% of the bonds scheduled to come due this year. A trader saw Conseco's 8½% notes due 2002 having "taken off" Thursday to close at 81.5 bid/82.5 offered, well up from prior levels around 75 bid/76 offered.

Trump Atlantic City Associates 11¼% first mortgage notes due 2006 were up about a point to end at 66 bid/67 offered; the company announced Wednesday that the Securities and Exchange Commission and the Atlantic City, N.J.-based gaming operator had agreed to settle a dispute arising from a misleading press release the company had put out back in 1999, which made it appear that Trump had beaten earnings estimates when it fact, it had done so only because a one-time special gain was not reported as such.

Trump - which neither denied nor admitted the allegations - blamed the snafu on since-ousted chief executive officer Nick Ribis, noted that it had promptly corrected the release and agreed not to do it again, and further noted that "no monetary penalty was imposed on the company. Furthermore, procedures in place since 1999 insure that such an action by an officer of the company cannot take place in the future."

Thursday's session was the last full trading session of the week; The Bond Market Association has recommended a 2 p.m. ET close Friday ahead of the Martin Luther King Day three-day holiday, which will shutter the U.S. debt markets on Monday.

In the primary, two deals priced. Coinmach Corp.'s increased its offering of eight-year senior notes to $450 million from $400 million and priced the deal at par to yield an even 9%. Deutsche Banc Alex. Brown ran the books. Price talk had been 8 7/8%-9%.

Also pricing was Regal Cinemas Inc., which brought $200 million of 10-year senior subordinated notes at a yield of 9 3/8% via Credit Suisse First Boston. The price talk was 9 3/8%-9 5/8%.

The first drive-by of 2002 saw execution on Thursday, as well: Constellation Brands Inc. announced, upsized and priced $250 million of 10-year notes, increased from $200 million. The off-the-shelf deal was run by J.P. Morgan and yielded 8 1/8%. A syndicate source told Prospect News that the new Constellation paper priced "a the low end" of 8 1/8%-8 ¼% talk.

The market anticipated terms on Longview Fibre Co.'s $185 million of seven-year notes via Banc of America Securities but a syndicate source said the deal is now expected to price Friday. Price talk is 10%-10¼%.

In a press release Wednesday the Longview, Wash.-based timber company announced that its EBITDDA for the first fiscal quarter of 2002 is expected to be between $18.0 million and $22.0 million, down from 2001's first fiscal quarter EBITDDA of $41.5 million.

Longview stated that the decrease "will primarily reflect the absence of profits from the sale of power."

Finally, a syndicate official late in Thursday's session advised Prospect News that terms might emerge Friday on Compton Petroleum Corp.'s $150 million notes via Lehman Brothers.

End

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