Winn-Dixie bonds collapse on Q2 results; surge in Owens Corning bank debt ebbs

By Paul Deckelman and Sara Rosenberg

New York, Feb. 10 - Winn Dixie Stores Inc.'s bonds were sharply lower Thursday, after the Jacksonville, Fla.-based supermarket operator reported a wider fiscal second quarter loss versus a year earlier and said that it was still facing tough competition and other potential negatives.

In bank debt dealings, it looks like Owens Corning's loan paper has finally run out of steam, actually ending the day down about two points - a rare course of events for this week, when daily gains never fell short of at least four points.

Winn-Dixie posted a net loss for the quarter of $399.7 million ($2.84 per diluted share), widening out from a year-earlier net loss of $79.5 million (57 cents per share).

The company's recently appointed president and chief executive officer, Peter Lynch, said on the conference call following the earnings release that his view, after getting a crash course on the company's problems in his first two months on the job, is that "the company has not been capitalizing on its competitive advantages. It's been trying to do too many things at once and has lost the focus on sales."

Lynch said that Winn-Dixie would implement some new tactics in hopes of boosting its sales in the short term, and predicted that sales - down 4.7% in the quarter - would be back on the rise by the fourth fiscal quarter, which ends in July. He said the tactics he was proposing were "not rocket science," and could be utilized without making major expenditures (see related story elsewhere in this issue).

One trader quoted the company's 8 7/8% notes due 2008 at 74 bid, "down 14, 16 points, pick a number" from Wednesday's levels around 88 bid.

Another trader saw them all the way down to 72 bid, 73 offered.

The first trader noted that the issue had been in the mid-90s a couple of weeks ago, before collapsing following the numbers. And he added that "I don't think it [the downturn] is over yet either. They're not going to get any better - they're just going to continue to get worse."

Although Lynch said that he had turned companies around before using the kinds of tactics he was proposing now, and although the company indicated that it had sufficient liquidity to carry out its aims, some analysts were expressing doubts, noting that if the company's vendors decide to start tightening up payment terms, that could leave Winn-Dixie in dire straits.

In fact, on the conference call, one analyst asked whether any of the vendors had in fact toughened the terms, and chief financial officer Bennet Nussbaum admitted that there had indeed been "some discreet tightening by a reasonably limited number of vendors," although he said that there had been no such additional tightening of terms in the past few weeks, and nobody had the company on a cash-on-delivery basis - yet. Lynch said that meeting with the vendors to keep them satisfied would be a key component of his strategy,

Winn-Dixie's assertions that it probably has sufficient liquidity, given no change in its bank loan terms of vendor terms "is a nice thing to say," the trader said, "but the reality is that the first thing that happens to any company like this is its suppliers start saying 'we don't want to end up in court, so pay us in cash' - but they don't have the cash."

Noting the company's acknowledgments that some suppliers - at this point still a few - had in fact toughened their terms, he said that "if that continues, that's the death knell for any retailer, no matter what retail business you're in."

Owens Corning loans decline

In bank debt dealings, Owens Corning's bank paper was quoted at 105 bid, 105.5 offered by the end of the day Thursday, according to traders. On Wednesday, one trader had the paper quoted at 107 bid, 108 offered and another trader had the paper quoted at 107.5 bid, 108.5 offered.

"It's been all over the place. It came back in," one trader said about Thursday's performance. "There was a lot of Owens activity in the morning and then it settled down."

"It's all technicals," another trader added.

Although there were some losses during Thursday's session, the paper is still up a considerable amount on the week being that it began Monday's session quoted at 90 bid, 92 offered.

The rally began once the actual bankruptcy court hearing on substantive consolidation ended late Monday afternoon, and although no decision on the issue has been announced, the bankrupt Toledo, Ohio-based building materials company's bank debt has been reacting positively all week.

The company's bonds - which had been falling all week in the wake of the substantive consolidation hearing - were meanwhile seen down a point at 63 bid.

Bankrupt Lancaster, Pa.-based floorcovering maker Armstrong World Holdings Inc.'s bonds were at 69 bid, down from 71.5 on Wednesday.

Muzak creeps back up

Also in bond trading news, Muzak LLC's 9 7/8% subordinated bonds due 2009 - which swooned down to 57 on Wednesday from around 70 - were seen having climbed a small part of the way back Thursday, to 59, while its 10% senior notes due 2009, which fell as low as 90 from 95 on Wednesday, came back up slightly to around 92.

The Fort Mill, S.C.-based recorded music service's bonds fell, traders said, after outside director David Unger resigned from the board, saying in his resignation letter that he was "forced to do this in light of what I feel are the company's failure to report material facts involved with operations, lawsuits among other things, as well as unwillingness by management and the majority shareholder to institute proper safeguards, including but not limited to the establishment of an independent audit committee," according to an 8-K filing with the Securities and Exchange Commission.

Unger added that he had "no choice but to relinquish this role to avoid potential personal liability." He urged all parties concerned "to take a more active role in the operations of the company and to start demanding more accountability from the management and the representatives of the majority shareholder."

The company, in response, said in its filing that it had proper safeguards in place and that the claims were without merit.

Boston Exelon loans trade

Back among the bank debt investors, energy project finance paper Boston Exelon was also active Thursday as a small auction took place at stronger levels, according to traders.

The auction paper traded at 107 5/8 on Thursday compared to Wednesday's closing levels of 105 bid, 105.75 offered, one trader said, explaining that the strengthening was probably just a function of demand for paper.

According to a second trader, the auction was for $5 million of Boston Exelon paper and it traded at 107.5 and was quoted ending the day at 107 bid, 108 offered.

The Boston Exelon project was owned by Exelon Corp. at one point but now it is owned by lenders.

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