Fleming falls on earnings warning; Kmart up on store closings; Georgia-Pacific hits the road

By Paul Deckelman and Paul A. Harris

New York, Jan. 14 - Flemings Cos. Inc.'s bonds and shares fell sharply Tuesday after the grocery wholesaler warned that its fourth-quarter earnings would come in well below analysts' expectations, citing the effects of a weak retail environment, increased competition, and the shrinkage of its largest customer Kmart Corp. But Kmart's bonds improved, helped by the bankrupt retailer's announcement of a second round of store closings and job cuts.

In the primary market, Georgia Pacific Corp. - which itself had issued an earnings warning only the day before - was heard getting ready to hit the road Wednesday with a $500 million bond deal, the big paper company's first since it was downgraded to junk bond status last year. Central Garden & Pet Co. and Casella Waste Systems, Inc. were also heard getting ready to begin marketing campaigns Wednesday for their somewhat smaller bond offerings.

With AMI Semiconductor, Inc., those four announced roadshow starts came to an even $1 billion of new business Tuesday, bringing the week's total to half a dozen new deals.

The forward calendar, at the midpoint of the month of January, shows eight deals on the road, totaling $2.375 billion.

Investors said to be saddled with loads of cash are expected to begin milling around Georgia-Pacific's $500 million of seven-year senior notes due 2010 (Ba1/BB+) on Wednesday, as the Atlanta-based paper products company attempts to raise cash to repay its bridge facility which matures Aug. 16, 2003. Goldman Sachs & Co. and Banc of America Securities will do the bookrunning on the deal that figures to price on Jan. 24.

Also on Wednesday Pocatello, Ida.-based electric circuit-maker AMI Semiconductor will start roadshowing $200 million of 10-year senior subordinated notes. The company will use proceeds from the deal, via Credit Suisse First Boston and Lehman Brothers, to refinance preferred stock and repay bank debt. It figures to price late in the week of Jan. 20 or early in the week of Jan. 27.

And Central Garden & Pet will start cultivating high yield investors on Wednesday as the roadshow starts on its $150 million of 10-year senior subordinated notes that could price late in the week of Jan. 20. Banc of America Securities and CIBC World Markets are joint bookrunners, and SunTrust Robinson Humphries is co-manager on the Rule 144A deal, proceeds from which will go to redeem the Lafayette, Calif.-based pet and lawn products company's outstanding convertible notes and repay bank debt.

Tuesday's session also brought a revival story as Casella Waste which postponed a similarly structured deal in the desolate high-yield market of late July 2002, announced plans to haul $150 million of 10-year senior subordinated notes (B3/B) along the junk bond roadshow circuit starting Thursday. As with the deal postponed last July 24 Goldman Sachs & Co. will do the bookrunning on the Rutland, Vt. wastehauler's deal, proceeds from which will go to repay the borrowings outstanding under Casella Waste Systems' senior secured credit facility and for general corporate purposes.

One market source told Prospect News on Tuesday that Casella, "walked away from a full book," last July when it pulled its deal.

"They didn't like the price," added the source, commenting on a deal that had been talked at 10½%-10¾%.

Another informed source recalled that the mid-summer 2002 high-yield market proved to be a wasteland for issuers and investors alike. Indeed on July 26, 2002 Bear Stearns reported that the high yield index had plunged 3% in the week to July 25, and was down 8.27% year to date.

One source close to the Casella offering told Prospect News on Tuesday that this time the deal should price "substantially inside" the July price talk of 10½%-10¾%.

Informed sources reported that investors are using the existing paper of junk bond issuing trash haulers IESI Corp. and Allied Waste to calibrate Casella's new senior subs.

"Those are the closest comps," said one official close to the deal.

"The Allied 10s trade anywhere from 9¼% to 9 3/8%. I don't say that (Casella) is going to price on top or inside of that. But if you look at the Allied Waste 10s and you look at it on a credit profile the two companies are similar so you can begin to put some fair market value on Casella based on where the Allied Waste 10s are.

"IESI trades a little bit below par," the source added, "and I think it was a 10¼% coupon. So accounts are using that as another point of reference."

Although half a dozen deals came into the new issuance market during the first two days of the Jan. 13 week sources inside the investment banks did not sound particularly elated when contacted Tuesday by Prospect News.

"It's a good pace if it wasn't the month of January, following the last six weeks of 2002 which were strong," one sell-side official commented. "I believe people thought the rate of new issuance would be a little higher than what it's been."

Another source from a different high-yield syndicate desk said: "People are looking to put money to work and there's not that much supply. The primary market really hasn't picked up."

Yet another high yield official told Prospect News on Tuesday that all-in-all the market seems "pretty quiet."

"Quite frankly I don't see as much value right now as I did a month-and-a-half ago," this sell-sider added. "A lot of these inflows have bid up bonds that were marginally attractive. Things have gotten awfully tight."

In the secondary arena, Fleming said that it expected to report earnings from continuing operations in the 2002 fourth quarter ended Dec. 28 of between $5 million and $6 million, or 10 cents to 12 cents per share. That's well down from the 31 cents per share Wall Street has been expecting, and also down from the 19 cents per share which the Dallas-based wholesale food distributor reported in the year-ago quarter.

Fleming bonds "got murdered," a trader said, quoting the company's 10 1/8% notes due 2008 and 10 5/8% notes due 2007 as having slid about 10 points on the session, to 78.5 bid/79.5 offered and 59 bid/61 offered, respectively.

At another desk, a trader saw the 10 1/8s dip as low as a wide 76 bid/79 offered before coming back slightly to end at a 78.5 bid level. He also saw Fleming's 9 7/8% notes due 2012 as having dropped to 49 bid/55 offered from 58.5 bid/60.5 offered previously

A distressed-debt trader saw the company's 9¼% notes down at least five to six points on the session, and possibly more, at 73 bid/76 offered, and quipped that investors were "really coughing up that Flem (phlegm)."

Things were no better on the equity side of the street, where Fleming's New York Stock Exchange-listed shares swooned $1.48 (22.70%) to end at $5.04, on volume of 3.9 million, a nearly six-fold increase over the usual activity level.

Fleming cited "a very soft environment," and said that a number of factors had dragged its performance for the quarter and for the whole year down, including continuing meat-price deflation, soft comparable store sales and a highly promotional retail environment, as well as higher employment-related expenses such as pension, healthcare and insurance costs.

The company projected that fourth-quarter EBITDA would likely come in around the $70 million to $73 million range - a pronounced drop from the company's own guidance last fall of EBITDA of around $95 million to $105 million. Even more cautious analysts had been looking for better EBITDA in the high $80 million neighborhood.

Among the factors weighing on Fleming's earnings, retail industry watchers said, was the stiff competition which its grocery customers, such as Albertson's Inc., the second-largest U.S. supermarket chain, are facing from the entry into their industry of the 800-pound gorilla of the U.S. retail business, Wal-Mart Stores Corp.

The Arkansas-based stores giant, which already dominates the discount retailing industry, has expanded many of its more than 4,000 stores to a super-store format, including large food-selling sections - virtually a regular supermarket in addition to a discount department store.

Wal-Mart's ubiquitous coast-to-coast presence has challenged the established supermarket operators - even big fish like Albertson's - to cut prices in order to compete, which in turn has put pressure on Fleming's own profit margins.

Fleming had already been feeling the pinch last year from another direction, seeing the unprofitability in a very competitive industry of its own retail supermarket division - only about 110 stores, a relatively minor player compared with giants like Albertson's, Kroger, Safeway and, increasingly, Wal-Mart. The division's lagging performance caused Fleming to announce last fall that it would shed the money-losing operation in order to focus on its core competency in wholesale distribution and use the sale proceeds to pay down debt. That caused its bonds and shares to shoot up briefly in the aftermath, but the company's continuing problems have brought those levels back down.

Fleming also announced Tuesday that the progress in selling the assets of its retail operation will likely be slower than it had previously anticipated (only 32 of the locations have been sold so far), and that it expected to ultimately net less than the $450 million which it had initially projected as likely proceeds from the divestiture, although the company declined to be more specific as to the expected timing and just how much less it would eventually reap.

Another Fleming problem is that its biggest customer has also been laid low by the competition from Wal-Mart - Kmart, now in bankruptcy proceedings. Troy, Mich.-based Kmart, which had over 2,000 stores when it entered Chapter 11 nearly a year ago, closed 283 of them in a first round of cuts last year, and on Tuesday announced plans to shutter another 326 locations, with the loss of as many as 37,000 additional jobs.

But while that may be bad news for the company's efforts to continue to compete with Wal-Mart and with Target Stores, bondholders were cheered by the prospect of the company taking another step toward its goal of slashing costs and debt in order to emerge from Chapter 11 by as early as April 30.

Kmart's 9 3/8% notes due 2006 rose two points on the news, to 18.5 bid/19.5 offered.

No firm quotes were seen on various bonds secured by leases on some Kmart locations; many of these trade at a considerable premium to the unsecured bonds.

A trader, who saw the unsecured bonds up "modestly" on the company's announcement, said that with the company closing a whole slew of stores, "it would make sense that you'd see some of the lease paper take a header [downward] on the news.

Kmart's already deeply depressed shares lost even more of what little value they had on the news, dropping nine cents (33.59%) to 17 cents per share, on heavy volume of 36.8 million. The shares - expected to become worthless in any reorganization - were long ago delisted by the NYSE and trade through the pink sheets.

Outside of the retailers, bankrupt telecommer WorldCom Inc.'s bonds were quoted half a point higher, at 27.5 bid.

On the downside, Charter Communications Holdings Inc. paper was "under pressure," a trader said, its 8 5/8% notes falling to 48.5 bid/49.5 offered, a three point dip.

Calpine Corp.'s bonds "drifted lower, even with no news on them," a trader said, quoting its 8½% notes due 2011 at 48.5 bid/50.5 offered, off from 52.5 bid/53.5 offered previously.

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