Winn-Dixie gyrates following Chapter 11 filing; rising oil brings airlines lower

By Paul Deckelman and Sara Rosenberg

New York, Feb. 22 - Winn-Dixie Stores, Inc. bonds swung around wildly Tuesday after the troubled Jacksonville, Fla.-based supermarket chain operator finally dropped the other shoe and did what many in the market had predicted it would do - seek protection under Chapter 11.

In other distressed debt news, rising oil prices were seen helping to drag airline bonds to lower altitudes.

And there was some volatility seen in the bank debt of Mirant Corp.

Winn-Dixie - whose 8 7/8% notes due 2008 had bounced around in the 50s last week, falling at mid-week on revelations of an accounting snafu only to come off those lows later in the week and end in the high 50s, something traders generally attributed to the proverbial "dead-cat bounce" rather than to any improvement in the company's fortunes - filed for protection from its bondholders and other creditors under Chapter 11 late Monday with the U.S. Bankruptcy Court for the Southern District of New York in Manhattan. It listed assets of $2.2 billion and liabilities of $1.9 billion, and said that it had lined up $800 million in debtor-in-possession financing from Wachovia Bank that will let it keep operating while it restructures.

A trader said that those bonds were initially "trading below 50" when the junk bond market reopened for business after the three-day Presidents Day holiday weekend, which had seen thin trading in an abbreviated session Friday, followed by a full market close on Monday.

After that, he said, the bonds had bounced off their early lows to go as high as 61-62 bid during the session, "really running around" before falling back from that peak to close out at 56 bid, 57 offered, on "quite a bit of activity." The bonds were trading flat, or without their accrued interest, as is customary following a default or a bankruptcy filing.

The trader said that he had heard there were "huge shorts" in the bonds on the part of people who had correctly guessed that they would be going lower as the company's fortunes deteriorated, and the need to buy back bonds to replace those borrowed and sold securities "was what was holding them up. Otherwise, I'm being told, they'd be a lot lower."

He saw the company's pass-through certificates, secured by interest in the stores' leases, higher, quoting Winn-Dixie's 7.808% notes at 73 bid, 75 offered, and its 8.181% notes at 72 bid, 74 offered. Unlike the 8 7/8% notes, which are considered unsecured debt, the pass-throughs, located higher in the food chain, were still trading with their accrued interest.

"The holders believe they will get par for their bonds," he said of the pass-though investors. "The 8 7/8% holders, and the [other] unsecured creditors, will get all of the equity in the revamped company. The [current] equity holders, they're out."

Winn-Dixie's shares were suspended from trading on the New York Stock Exchange, and are expected to now trade over the counter. That stock was trading as high as $8.42 a share last spring - but on Friday, the last day that it traded before the bankruptcy filing, it closed at $1.47, down eight cents a share.

Traders generally agreed that the filing came as no surprise, with the bankruptcy a slow-motion train wreck that has unfolded over the past year since the company announced on Jan. 30, 2004 that it had posted a loss for the 2003 fourth quarter, contrary to Wall Street expectations of a profit, however diminished. After that, it was pretty much downhill from there.

The bonds, which had traded above par before the startling loss announcement, dropped down into the 70s and 80s. While the bonds eventually crept back up to levels around par, they couldn't hold them, and retreated back into the 80s late last year as it became apparent that the company's turnaround efforts, which included closing many stores, were not bearing fruit. Along the way, then-CEO Frank Lazaran was sacked in favor of former Albertson's Inc. president Peter Lynch, who presided over the latest negative earnings report and conference call on Feb. 10, when the bonds slid into the low 70s from prior levels at 88. Over the next several sessions, they continued to erode down into the mid-60s, but then appeared to stabilize. However, Wednesday's announcement that the company had miscalculated EBITDA in the September 2004 quarter, and thus had overstated its liquidity level and borrowing availability hammered the bonds all the way down into the 50s.

A trader said that he had figured the company for a likely bankrupt "several years ago," as competition from rival southeastern supermarket chains like Publix and Food Lion and from Wal-Mart Stores' growing encroachment on traditional supermarket turf with its sell-everything superstores, continued to eat away at the venerable Winn-Dixie's top and bottom lines.

He saw the bonds trade as high as 60 during the session, before going out at 55.5 bid, 56.5 offered, trading flat, but said he had not seen the sharp falls to the area around 50 and below the first trader had noted. The real-estate-backed pass-throughs, meanwhile, had moved up to 72 bid, 74 offered, up from 68 bid, 70 offered.

Bondholders hope for 65 to 70 cents

"That the unsecured regular bonds are trading in the 55-56 area, is a sign," he said, that "holders expect that they will get more, maybe 65 or 70 [cents on the dollar], with some estimates as high as the low 70s. If you're buying it today at 55, it's because you think it's worth more. You're not going to pay 55 today in order to get 55 back a year from now."

The bankruptcy, he said "will take a while to work itself through," since this was not a pre-packaged deal in which the company and its creditors have pretty much agreed on who gets what. Quite the contrary, he said, this was a hasty flight into the courts, precipitated by "the suppliers, the vendors," some of whom had already tightened the screws on the company in terms of tougher payment terms for merchandise, according to what the company's chief financial officer, Bennet Nussbaum, said during the recent conference call.

"Once the suppliers come after you and you don't have a lot of cash on their hands - and they [Winn-Dixie] don't - you have no choice [but to file]. Otherwise, your shelves are going to be empty."

Now that the company has filed he said, "they can immediately break those leases" on underperforming stores that the company had closed, but was still making lease payments on (Winn-Dixie actually owns only a relative handful of its more than 900 stores, and leases the rest).

Winn-Dixie said it will seek court approval to terminate the leases of two warehouses and about 150 stores that were closed previously, for an annual cash savings of approximately $60 million.

"They're getting the DIP loan from Wachovia, so they can pay all the vendors in cash, and that will get that out of the way," he said. "Now it's just a question of how well they clean themselves up" by getting rid of underperforming stores.

"They have an opportunity to really turn themselves around," he opined, "so hopefully, they will do what they need to do, which is to take a hard look at every store, to see not only whether it fits their business plan but whether or not they think it will be a profitable store. And if it's not, this is their opportunity to get rid of it."

That could mean closing some stores in markets where the chain has operated since its founding in 1925 - but where there might be a big new Wal-Mart down the street, pulling away all of the Winn-Dixie's customers with its lower prices.

"That's what they should do," he concluded. "Now the question is whether they actually will."

High oil hurts airlines

Elsewhere, a trader said that "oil was a lot higher" Tuesday, and this was dragging airline bonds lower.

Light sweet crude for March delivery settled at $51.15 a barrel on the New York Mercantile Exchange, an increase of $2.80 on the day, while the April contract, which will now become the spot month, pushed up to $51.42 a barrel. Crude prices - which had fallen into the lower 40s late last year from recent peak levels in the mid-50s - have recently been climbing in response to the sagging dollar, cold weather in the United States constricting fuel oil supplies, and the possibility of a production cut by the Organization of Petroleum Exporting Countries.

Rising oil prices are seen as a harbinger of higher jet fuel prices - an expense which has pushed the major air carriers deeper into the red over the past year.

For instance, the trader said, American Airlines parent AMR Corp.'s 9% notes due 2012 were down 1½ points at 73.56 bid, 74.5 offered - even though the Fort Worth, Tex.-based carrier, largest in the United States and the world, stands to profit from the news that the Department of Transportation plans to award authority to fly new routes in China to American and to Continental Airlines Corp.

"No one seemed to care" about that news, the trader said. "Oil was the main driver" behind the fall in AMR.

Ironically, the news had more impact - negative, of course - on Delta Air Lines Inc., which will be "boxed out" by the DOT ruling, he said, quoting the Atlanta-based air carrier's 8.30% notes due 2029 down two points at 38.5 bid, 39.5 offered. However, he saw its benchmark 7.70% notes due later this year pretty much unchanged at 89 bid, 90 offered.

Northwest Airlines Corp.'s 8 7/8% notes due 2006 were down ¾ point at 91.75 bid, 92.75 offered, while its 10% notes due 2009 were a point lower at 73 bid, 74 offered.

Mirant's loans trade

In bank debt dealings, Mirant Corp.'s 2003 paper saw a little bit of trading activity in an otherwise post-long holiday weekend-muted market, with the paper trading at a high of 73 and a low of 72.5 during the session, according to a trader.

By the end of the day, the bankrupt Atlanta-based energy company's bank debt was quoted at 72.5 bid, 73 offered, the trader added.

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