Fleming continues to slide as troubles mount; Gray TV sells $100 million add-on deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 5 - Fleming Cos. bonds and shares continued to slide on Thursday, as the bad news for the Dallas-based wholesale and retail grocery operator continued to total up. Qwest Communications International Inc. bonds were mostly seen little moved by a Moody's Investors Service downgrade that market participants generally were already expecting anyway. On the upside, energy issues pushed higher on firmer natural gas prices, while homebuilders' bonds also strengthened in the wake of good numbers and optimistic forecasts for the industry.

In primary market activity, Gray Television, Inc. sold a quickly-shopped $100 million add-on offering to its outstanding 9 ¼% senior subordinated notes due 2011 (B3/B+).

The registered deal priced at par via Wachovia Securities, Banc of America Securities and Deutsche Bank Securities.

In so doing the Atlanta communications company achieved a better interest rate than was the case with the original deal which priced last December to yield 9 3/8%.

One syndicate official, commenting that Gray seemed to engender positive investor sentiment, noted that it priced "dead center" of the 9¼% area price talk.

Earlier in Thursday's session a syndicate source told Prospect News that a deal sidelined by market conditions during the run-up to Labor Day began its roadshow in earnest.

Chukchansi Economic Development Authority's $135 million of senior notes due 2009, a deal that will be marketed sans credit ratings, is expected to price on Sept. 18 via Dresdner Kleinwort Wasserstein and Banc of America Securities.

The source said that the Coarsegold, Calif. tribal gaming firm, which is using the proceeds to build a new casino complex in the vicinity of Yosemite National Park, is securing the deal with a letter of credit, a cash collateral account and a pledge by Cascade Entertainment of a portion of its management fees. The Chukchansi Economic Development Authority will also put the first three interest payments (approximately $28.8 million) in an escrow account.

One source familiar with the Chukchansi deal told Prospect News Thursday that the roadshow figures to be "pretty extensive" and added that the unrated offering is not something "that you take off the shelf and price."

Prospect News learned Thursday from sell-side sources east of the Atlantic that the eurobond offerings heard to currently be in the market still appear to be September business.

They include, in order of size, Jefferson Smurfit's €900 million equivalent of 10-year senior notes in dollar, sterling and euro tranches via Deutsche Bank Securities and Merrill Lynch, Legrand, SA's €600-€750 million of notes via Credit Suisse First Boston, Lehman Brothers and RBS, and Brake Bros.' £175 million via JP Morgan and Credit Suisse First Boston.

On Wednesday Prospect News learned that Gerresheimer Holdings GMBH & Co. KG is giving careful consideration to bringing back its €150 million senior subordinated notes (B3/B) via JP Morgan, Goldman Sachs, which was postponed in the choppy high yield market of late July.

"Smurfit, Brake Bros. and Legrand are expected to be the first three out of the gate at this point," a sell-sider in the eurobond market told Prospect News in a Thursday e-mail message. The source added that there are a few other deals heard to be coming to market but that timing is presently "unclear."

Back in secondary dealings, Fleming Cos. "still got weaker, as you can imagine, with the latest news," a trader said. He saw Fleming's 10 1/8% notes due 2008, which had dipped into the lower 90s on Wednesday, retreating down to around 87 bid/89 offered Thursday, while its subordinated 9 7/8% notes due 2012, last seen Wednesday flailing around in the lower 70s, swooned to offered levels as low as 65.5, with no bids seen.

At another desk, the assessment was that Fleming "looks off, big," with those 9 7/8s quoted at bid levels as low as 62 and the 10 1/8% paper at 87.5 bid and "continuing to erode." Fleming's 10 5/8% notes due 2007 fell to 70 bid from Wednesday's late levels in the mid-70s.

A distressed-debt trader, whose shop hadn't really paid much attention to Fleming as long as its senior bonds were hovering around par levels, noted that Fleming "is coming in [i.e., going down in price]. They've gone from par down into the 80s in just a few sessions. We're watching them but we're not trading them - yet."

On the stock side of the ledger, Fleming's shares, which fell 14.07% in Wednesday's New York Stock Exchange trading, were down yet another $1.08 (13.50%) on Thursday, ending at $6.92. Volume of 5.6 million shares was about five times the usual.

Fleming shares began their slide last Friday, with investors spooked by the potential ramifications of a class-action lawsuit filed with the federal court for the Eastern District of Texas. That suit, brought on behalf of investors who bought Fleming shares between Feb. 27 and July 30, charges that management had issued "a series of materially false and misleading statements to the market" during that time which had the alleged effect of "artificially inflating the market price of the Company's securities."

Specifically, the plaintiffs in the suit allege that Fleming painted an unreasonably cheerful picture of how its retail operations, including its Baker's, Rainbow Foods, and Sentry Foods/SuPeRSaVer chains were doing, while supposedly knowing all along that the retail business was not doing at all that well. Fleming called the suit "baseless" and said it would defend itself "vigorously."

There was more anxiety-provoking news for Fleming share and debt holders on Thursday; in a conference call with analysts, Fleming warned that it would likely miss its own forecasts for financial performance in the second half of the year. In July, Fleming had projected that it would have per-share earnings of between 65 and 70 cents in the third quarter and 80 to 85 cents in the fourth quarter. Fleming blamed its anticipated lower earnings on poor performance from its retail division. In the second quarter, the retail unit, which operates 127 stores in the Midwest and the western U.S., produced operating earnings $9 million lower than a year earlier, with a 4.7% decline in same-store sales from year-ago levels. The company also declined to say outright whether it expected to generate positive operating cash flow this year.

Yet another potential headache surfaced in the form of a story in Thursday's Wall Street Journal, which claimed that vendors who supply merchandise to Fleming complain that the company has refused to pay them in full for their shipments, instead taking disputed deductions for purportedly missing or damaged goods on its invoices. The article quoted one former Fleming executive as estimating that those disputed deductions had totaled $100 million 15 months ago - a figure that Fleming Chairman and CEO Mark Hansen called "wildly inaccurate." Hansen said that the company kept a reserve set aside for such claims, although he declined to tell questioners on the conference call just how large that might be. He said that the problem was by no means as widespread or as serious as the Journal account would suggest and also said that only a very small proportion of Fleming's approximately 2,000 vendors had stopped doing business with Fleming over the disputed payments.

Fleming got some support Thursday from one of its vendors, Solo Cup Co., which had been named in the Journal article as having had a major falling-out with the grocery wholesaler. Solo, a maker of paper cups and plates, released a statement expressing chagrin at what it called "the inaccuracies [in the WSJ story] relating to statements regarding our company's relationship with Fleming. While Solo and Fleming have issues from time to time, they get resolved in the course of normal negotiations. We do not have any open deductions that have not been resolved with regard to our mutual business with Kmart."

Fleming is the largest supplier to Kmart Corp., the bankrupt Troy, Mich.-based discount retailing giant, which in turn is Fleming's biggest individual customer.

Anxiety over the lawsuit, Fleming's pessimistic earnings projections and the vendor payments issue appeared to have overshadowed relatively positive debt-related news. Fleming told those on the conference call that it has been told by the major bond rating agencies that they have no plans to reduce the company's credit ratings; Standard & Poor's in fact, declared Thursday afternoon that "issues surrounding Fleming Cos. Inc.'s (BB/Negative/--) vendor-related deductions have no immediate impact on the company's credit rating or outlook. At this time, Standard & Poor's has no indication that the deductions are improper or overstated, or that they will result in any charge or restatement of earnings. "

Fleming also said on the conference call that it was standing by its previously announced target of reducing its debt by $100 million by the end of the year. The company said the $100 million would come from free cash flow.

Fleming's troubles may have pulled down the bonds of some of the other names in the high yield supermarket sector; Ingles Markets Inc.'s 8 7/8% notes due 2011 dipped half a point to around 97 bid, while Stater Bros. Holdings Inc.'s 10¾% notes due 2006 were quoted a point lower, at 103 bid.

Elsewhere, even though Qwest Communications announced on Wednesday that it had reached an accord with its banks on amending its $3.39 billion credit facility, thus avoiding the prospect of a messy default or even a possible bankruptcy, Moody's Investors Service was not impressed, and on Thursday, the ratings agency cut Qwest's senior unsecured debt rating and that of its Qwest Capital Funding unit two notches to Caa1 from B2 previously, and warned that it might cut them again and could also cut its Ba3 rating for the company's Qwest Corp. regulated subsidiary.

The ratings agency noted that as part of its deal with the bankers, Qwest had to pledge its Qwest Corp. stock as security for the credit line, and had to grant secondary liens on the stock and on certain assets of its QwestDex telephone directory business, which is being sold to two buyout firms in a $7.05 billion transaction, for which QwestDex obtained a separate $750 million term loan. It cautioned that the downgrades reflect the subordination of Qwest Communications' and Qwest Capital Funding's unsecured debt to the two loans, pushing bondholders further down the line in the event of any kind of restructuring scenario.

But despite that ominous sounding verbiage from Moody's, several market-watchers said that there was little change in Qwest debt on Thursday.

"Bids were down two points, and offer levels were down a quarter [point]," one trader said, estimating that overall, it was half a point lower. "The bids faded after the Moody's news."

He noted that the market was already very well aware of the expected subordination of Qwest and Qwest Capital Funding debt under the new financing terms, an awareness reflected in the current market prices of the bonds, with Qwest's benchmark 7¼% holding company notes due 2011 hanging in around the mid-50s and its 7¾% holding company paper due 2006 a touch better, in the lower 60s. "I don't know why anyone even pays for those [rating agency] services," he asserted, voicing the opinion that they tell the market what it already knows, long after the fact.

Another trader, on the other hand, said that he had seen "a lot of selling" of Qwest paper after the downgrade, with bids dropping a point or two in the aftermath, although he suggested that the downgrade might have just been an excuse for profit-taking, since the Qwest bonds "have had a pretty good run in the last couple of weeks."

Against that background, he said, "they dropped down, and a lot of selling came into it, all looking for the left [bid] side." He added that "there will be a left side [Friday] because the shorts were all selling into it as they went up. But they definitely were affected after the downgrade. "

Also on the downside, airline paper was seen weakening again, with United Air Lines not getting much of a boost from its change of CEOs earlier in the week, as Glen Tilton permanently took over the job which Jack Creighton had been filling on an interim basis. A distressed-debt trader quoted the UAL bonds in the 18 bid/21 offered area, down from levels in the mid-to-lower 20s which had been seen right after UAL had announced Tilton's appointment and his intention of sitting down with the troubled carrier's labor unions to try to make the case for additional employee cost concessions.

A trader said the airlines' weakness helped push down such related names as aircraft interior components maker B/E Aerospace, whose 9½% notes dipped to 87 bid/88 offered from prior levels around 89 and its 8 7/8% notes due 2011, which were two points lower at 84.5 bid/85.5 offered. Also lower was another aircraft equipment maker, Sequa Corp., whose 9% notes due 2009 lost a point to 94.5 bid.

On the upside, homebuilders' bonds continued to show their industry's strong foundation, as interest rates and thus mortgage rates remain at recent historic low levels. Hovnanian Enterprises, whose bonds had firmed Wednesday after it reported much better-than forecast third-quarter earnings and raised its full-year guidance, continued to strengthen, its 9¼% notes due 2009 up a point to nearly 102 bid, with "more buyers than sellers," a trader said. The homebuilder had reported net income for the fiscal third quarter ended July 31 of $39.2 million ($1.20 per share) - well up from $21 million (71 cents per share) a year ago, and better as well than the analysts estimates of earnings around 80 to 90 cents a share, and which accordingly raised its full year per-share earnings outlook to a range of $4 to $4.10, well above the $3.30-to $3.40 Wall Street has forecast.

He declared that whole sector to be "nosebleed territory," with the bonds of most companies trading at or above par. D. R. Horton Inc.'s 10½% notes due 2005 gained a point to end at 105, while Lennar Corp.'s 9.95% notes due 2010 were quoted up a point at 108.

The trader said there was also strength in the whole energy sector, particularly in exploration and production companies active in searching out natural gas deposits, such as Magnum Hunter Corp., whose 9.60% notes were a point better, at 102. He noted the firming in natural gas prices as the catalyst, declaring that "the whole sector is better. We had people scurrying around, looking for offerings in that sector."

Other E&P names on the upside included Vintage Petroleum Inc., whose 8¼% notes due 2012 were quoted up more than two points, at 100.50 bid. Pioneer Natural Resources were seen about a point better, at 103.5.

The junk market's relative stability stood in contrast to stocks, which again got pummeled, with the Dow Jones Industrials off 141.42 at the close. "Considering where stocks are," a trader opined, I'm surprised the [junk] market is where it is. Stocks go up a hundred points, and then down a hundred points. They're building a base - but whether that base will be at 10,000, at 8,000 - or at 2,000 - is anyone's guess."

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