Xerox up as fourth quarter results impress investors; Kmart continues rally on reorganization filing

By Sara Rosenberg

New York, Jan. 28 - Xerox Corp.'s bank debt saw an improvement of a couple of points on Tuesday as the company once again surprised analysts and market participants with better-than-expected earnings results. Kmart Corp.'s bank debt also headed north as it continued the rally that began with Friday's announcement of a plan of reorganization filing.

Xerox's revolver was up a few points on Tuesday with quotes around 91 bid, 92 offer following the release of positive earnings news, a trader said.

The Stamford, Conn. document company reported fourth-quarter earnings of 1 cent per share, including restructuring charges of 34c per share and a one-time tax benefit of 11c per share related to the completion of a tax audit. Excluding restructuring and the tax gain, the fourth-quarter results reflect earnings of 24c per share. The mean analyst estimate was a loss of 10c per share, according to Multex.

Fourth quarter operating cash flow was $634 million and the company's worldwide cash position was $2.9 billion at year-end. Total revenue for the quarter was $4.25 billion, a year-over-year decline of 3%.

For 2002, Xerox delivered a return to full-year profitability. Income for the full year was $91 million or 2c per share, including full-year after-tax restructuring charges of $470 million or 58c per share. Revenue in 2002 was $15.8 billion, compared with $17 billion in 2001.

As for the first quarter of 2003, "We expect that our expanded product, solutions and services portfolio will continue to drive modest improvement in year-over-year equipment sale trends," said Anne M. Mulcahy, chairman and chief executive officer, in a news release. "The flow through from our accelerated cost reductions in the fourth quarter will further strengthen our bottom line."

Kmart's bank debt continued to rise up on Tuesday, still in response to the announcement late Friday that the company filed its plan of reorganization, which anticipates an emergence from Chapter 11 in April. The debt was quoted around 37 bid, 39 offer, up about a point or two from Monday's quotes in the 36 area, a trader said. On Monday, the bank paper also rallied by about a point and a half to two points.

The plan of reorganization calls for a substantial investment by ESL Investments Inc. and Third Avenue Value Fund. Other details of the plan include: pre-petition lenders, who are owed approximately $1.08 billion, will receive cash equal to 40% of the principal amount of their claims in lieu of shares of new common stock of the reorganized Kmart; holders of $2.3 billion face amount of Kmart's pre-petition notes and debentures along with trade creditors, service providers and landlords with lease rejection claims will share pro rata in the stock of reorganized Kmart, other than the shares allocated to the plan investors; and, a Creditors' Trust will be established for the benefit of creditors and, subject to the receipt of requisite votes, holders of trust preferred securities and/or common stock, to pursue all causes of action arising out of the stewardship investigation.

As previously reported, Kmart has received a commitment for $2 billion in exit financing from GE Commercial Finance, Fleet Retail Finance Inc. and Bank of America. The exit financing facility would replace the company's current $2 billion DIP facility on the effective date of the reorganization plan.

Security for the loan will be the Troy, Mich. discount retailer's inventory.

Proceeds will be used to help fund the company's working capital needs, including borrowings for seasonal increases in inventory.

In primary news, Therma-Tru Corp. held a retail launch for its new $330 million credit facility on Tuesday, about two months later than the agent launch, which occurred around mid-November.

"It's going really well," a syndicate source said in regards to the retail launch. "We got about 70 guys that confirmed their attendance."

According to the syndicate, the retail launch came so much later only because the syndicate was waiting to fit the deal into the calendar. However, at the time of the agent launch, a fund manager told Prospect News that it was an interesting time in the market to come with a pricing refinancing and that the deal would need to be good in order for it to get done.

A market professional seemed to agree with the fund manager's prior statement, explaining that the two-month time lapse was "probably because they felt they couldn't catch a bid and they wanted to wait until the market got a little warmer and a little more friendly.

"I think they got a better market than they did in the fall," he added.

The loan consists of a $75 million revolver with an interest rate of Libor plus 275 basis points and a $255 million term loan B - upsized from $230 million since the agent bank meeting - with an interest rate of Libor plus 325 basis points, a syndicate source said.

Essentially, Therma-Tru's new credit facility is a pricing refinancing of its existing loan.

The loan was originally closed and funded in June of 2000 with the term loan B priced at Libor plus 325 basis points, a fund manager previously told Prospect News. However, the company fell short on its performance and amended its facility, changing the interest rate on the term B to Libor plus 375 basis points. Now that performance is back on track, the company is looking to obtain the original pricing on the loan again, the fund manager explained.

CIBC World Markets is the lead bank on the Maumee, Ohio fiberglass door manufacturer's deal. Fifth Third Bank and NatCity were added as agents on the deal, the syndicate source said. Deutsche Bank led the original deal.

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