Winn-Dixie bonds fall as stock swoons; Interstate Bakeries bank debt quietly lower

By Paul Deckelman and Sara Rosenberg

New York, Aug. 31 - Winn-Dixie Stores Inc.'s bonds were being quoted around four to five points weaker Tuesday, even as the Jacksonville, Fla.-based supermarket operator's shares at one point lost more than 20% of their value before bouncing off their lows to finish with a somewhat more moderate - but still sizable - loss. Observers cited factors ranging from the approaching Hurricane Frances to renewed analyst-driven bankruptcy speculation about the company.

Among bank debt investors, Inquiries on Interstate Bakeries Corp.'s loans continued to hit trading desks, and some players even tried to make a market on the paper at levels below where it had been just a few days ago - a task that once again proved difficult as not enough people were present to create trading activity.

A trader saw Winn-Dixie's 8 7/8% notes due 2008 as having opened at 92.75 on Tuesday morning, down slightly from Monday's close at 93 bid, 94 offered - and then, he said, the bonds continued to careen downward like an out-of-control shopping cart as the day wore on, ending at 88 bid, 89 offered, about five points lower on the session.

Another trader said he had seen the Winn-Dixies quoted as low as 87 bid, and quoted them having gone home at "a wide" 87.5 bid, 90.5 offered, "though I didn't see much actual trading." He said the bonds had fallen to those levels from 92.75 bid, 93.75 offered previously.

The first trader said that the Winn-Dixie bonds had been gradually coming in for some time now - he said that they were in the mid-to-upper 90s early in the month, "before their numbers" - the company released fiscal fourth-quarter results on Aug. 19, posting a net loss of $22.7 million, or 16 cents share, including discontinued operations, versus year-earlier net earnings of $62.5 million, or 44 cents per share. For the full 2004 fiscal year ended June 30, the company reported a net loss, including discontinued operations, of $100.4 million (71 cents per share), versus year-ago net earnings of $239.2 million ($1.70 per share).

Increased competition from Wal-Mart Stores Inc. and other operators in many of its traditional markets was cited as a key driver behind that swing into the red, as well as restructuring costs associated with the company's efforts to close 156 of its 1,078 stores and spruce up its remaining stores and institute new customer-friendly marketing policies.

For a while, the trader said, there was some talk in the market that an investor or buyer for some or all of its stores might step forward - he mentioned Belgium-based Delhaize Group as one potential suitor - but he said that with Winn-Dixie continuing to report bad numbers, "such a takeover now isn't going to happen - better to wait till they go bankrupt and then pick over the assets then."

Renewed talk of possible bankruptcy was cited by traders as one of the factors behind the fall in the bonds, as well as the major slide in the company's New York Stock Exchange-traded shares, which fell all the way down to an intra-day low of $3.95 from Monday's close at $4.89, about a 20% plunge, before bouncing slightly off their lows to finish down 72 cents (14.72%) to $4.17, on volume of 10.77 million shares, about nine times the average daily turnover.

Analysts talk of bankruptcy

The Bloomberg news service ran a piece about the market's revived Winn-Dixie bankruptcy fears, quoting retailing analyst Gary Giblen of C.L. King & Associates in New York as having said that "it's becoming evident that the results are going downhill and there is no credible plan to arrest the meltdown of the company."

On Aug. 20, following the release of the quarterly and fiscal 2004 numbers, analyst Meredith Adler of Lehman Brothers, while noting management's steps to shrink the company and strengthen remaining operations, said in a research note that "we [Lehman] are highly skeptical that these will do anything but delay an inevitable demise given the company's lack of dominance of its 'core markets', which are in highly competitive geographies."

Besides the bankruptcy buzz, there were some indications that among the factors being cited for the slide in the stock, and to a lesser degree, the bonds, were fears that Hurricane Frances could come barreling through Florida, the company's home turf, leaving a swath of destruction similar to that recently wreaked by Hurricane Charley. A majority of the company's stores are concentrated in Florida, Georgia and North Carolina, all of which are coastal, hurricane-prone states, Florida especially. Another factor being bandied about in various news reports was an overall broader investor retreat from most grocery-store stocks and consumer cyclical issues.

And a trader attributed the fall in the bonds - at least in part - to news that the company had been named as a defendant in securities fraud lawsuits brought by disgruntled investors dismayed with the sharp fall in its shares since the beginning of the year. Bloomberg reported that three current and former senior executives and the company itself face several class-action lawsuits filed with the U.S. District Court for the Middle District of Florida

The trader quoted Winn-Dixie's 11 7/8% notes "weaker," at 90 bid, 92 offered around midday, down from 92 bid, 94 offered on Monday. By the day's end, he said, those bonds had eroded further, to 88 bid, 89.5 offered.

WCI Steel better

Also on the distressed-bond scene, WCI Steel Inc.'s 10% notes scheduled to come due on Dec. 1 were quoted as having firmed to 62.5 bid, about a five-point gain, possibly in response to the news that MIC Capital Inc., along with D. E. Shaw Laminar Portfolios, LLC, had filed a proposed Chapter 11 reorganization plan for the Warren, Ohio-based steelmaker on Friday evening with the U.S. Bankruptcy Court for the Northern District of Ohio, which is overseeing WCI's restructuring. That plan now stands as a rival to the plan officially proposed by the company, as well as another plan put forward by WCI's noteholders.

"The fact that there's another plan to choose from certainly could be a positive," said a market source, although he had seen no trading in WCI's notes.

MIC - an affiliate of Marco International Corp. - said in a news release Monday that it believes its plan "provides a more favorable alternative for the employees and creditors of WCI than the separate plans proposed by the debtors and the noteholders."

Among other things, MIC said, its plan "provides for better creditor recoveries than the debtors' plan, and is predicated on a business plan that will increase that plant's output, thereby providing additional hiring opportunities."

The upstart alternative plan will be accompanied by a firm contract for coke, a critical raw material for the production of steel, MIC said - unlike either of the other two plans.

"This is important because, in May 2004, US Steel, WCI's current coke supplier, announced it would no longer supply coke to the open market, forcing companies that depended on coke from US Steel scrambling for very scarce coke supplies," MIC said. "Neither the debtors' plan nor the noteholders' plan suggests that they have secured a coke source to meet supply needs starting in December 2004."

WCI sought Chapter 11 protection from its junk bond holders and other creditors in September 2003.

Adelphia bonds flat to higher

Elsewhere, Adelphia Communications Corp.'s bonds were seen pretty much unchanged to up slightly, with a trader quoting the bankrupt Greenwood Village, Colo.-based cable operator's 10¼% notes due 2011 unchanged at 92.5 bid, while its 10 7/8% notes due 2010 were half a point better at 92, although he called it "no really big change."

Another trader said he saw the company's 6% convertible notes at 28 bid, 30 offered, "up a couple of points."

Interstate focus in loan trading

On the bank debt front, Interstate Bakeries remained the focus of many players, in the absence of very much trading in the bank paper of other distressed issues - and in the absence of many market participants, as they take advantage of what is normally the slowest trading time of the year to vacation during the waning days of the summer season.

One trader said he saw the Kansas City, Mo.-based baker's paper quoted at 96 bid, a few points lower than the low 98 levels that were seen prior to Monday's announcement that the company would be delaying filing its 10-K report for 2004 with the Securities and Exchange Commission.

However, the same trader had also heard that some market participants were quoting the paper around 97 bid, 97.5 offered.

"Ninety six sounds too low to me. I think to have to trade, it would have to move a little higher," a trader said.

"I don't think this thing will dip too much. They have some name brands," such as Wonder Bread, Hostess Twinkies and Drake's Cakes. But then again, he added, "diets, like Atkins and the South Beach diet [both of which call for the dieter to restrict intake of carbohydrates] are not making it any easier. Once everyone's back, you'll see some trades and then we'll be able to see where the market is," the trader added.

Interest in the name first picked up on Monday after the company announced that it missed its Friday deadline, for a second time, for filing its 10-K annual report for the fiscal year ended May 29 with the SEC. Talks are taking place with representatives of the agent bank under its senior secured credit facility regarding the situation.

Furthermore, the company revealed that it hired turnaround specialist firm Alvarez & Marsal to pursue an effective going forward business strategy.

The filing delays resulted from initial data entry and training deficiencies in Interstate Bakeries' newly implemented financial reporting systems, uncertainty regarding anticipated fiscal 2005 first quarter results, uncertainty as to whether the company will be in compliance with covenants in its senior secured credit facility agreement during fiscal 2005 and the possibility that the report of its independent auditors with respect to the fiscal 2004 financial statements might contain a going concern paragraph, the company explained in a news release.

Interstate had previously received an extension to Friday for the filing because of delays in finalizing its audited financial statements arising from the previously announced investigation of the manner for setting workers' compensation reserves and other reserves.

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