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25 Sep 2001
MOODY'S ASSIGNS B2 RATING TO PROPOSED $250 MILLION SENIOR SUBORDINATED NOTE ISSUE OF FLEMING COMPANIES, INC; CONFIRMS ALL OTHER RATINGS; REVISES OUTLOOK TO POSITIVE FROM STABLE
Approximately $2.0 Billion of Debt Affected.
New York, September 25, 2001 -- Moody's Investors Service rated the following proposed new issue by Fleming
$250 million senior subordinated notes assigned a rating of B2.
Moody's also confirmed all other ratings of the company as follows:
$737 million bank loan at Ba2,
$355 million 10 1/8% senior notes (due 2008) at Ba3,
$250 million 10 ½% senior subordinated notes (due 2004)
$250 million 10 5/8% senior subordinated notes (due 2007)
$150 million 5 ¼% convertible senior subordinated
notes (due 2009) at B2,
Senior implied rating at Ba3, and
Long-term issuer rating at B1.
Moody's also withdrew the rating on the company's completely repaid medium
term notes. The rating outlook is revised to positive from stable.
Funds from the proposed new issue will be used to pay down outstanding
borrowings under the $600 million revolving credit facility.
Permanent new capital will provide a larger borrowing cushion for working
capital needs as anticipated growth in the company's wholesale and retail
segments requires greater capital investment.
The positive outlook considers Moody's opinion that the Kmart (senior
unsecured Baa3 with a negative outlook) integration has largely gone according
to plan and that, with continued wholesale and retail efficiency
improvements from increased volume, ratings could be increased over
the next four to six quarters. Leverage and fixed charge coverage
have stabilized after a multi-year decline, and cash flow
increases leading to materially improved trends in debt protection measures
could prompt an upgrade.
The ratings recognize Fleming's status as the nation's largest food distributor,
the economies of scale that the company can bring relative to its smaller
competitors, and the company's position as the only national food
distributor. The ratings also consider the ongoing improvements
in the company's retail and wholesale segments. However,
the ratings reflect the company's leveraged financial condition and that
directly, or indirectly through customers such as Kmart, the
company competes with respected distributors and retailers such as Wal-Mart
(senior unsecured Aa2). The intense competition within the fragmented
distribution industry and the necessity to replace clients lost in the
consolidating supermarket industry also impacts Moody's view of the risks
facing the company.
The Ba2 rating on the bank loan (comprised of a $600 million revolving
credit facility commitment and a $137 million term loan) recognizes
the seniority of this debt relative to other parts of the capital structure.
The accounts receivable and inventory of the company and its subsidiaries,
as well as the equity shares and guarantees of all domestic operating
subsidiaries, secure this loan. About $345 million
of the revolving commitment was undrawn as of July 14, 2001.
The Ba3 rating on the senior unsecured notes reflects, besides the
guarantees provided by subsidiaries, their effective subordination
to the bank loan. However, the sizable amount of subordinated
debt and equity supports their relative rating placement.
The B2 rating on the senior subordinated notes considers that the notes
are guaranteed by the subsidiaries but are contractually subordinated
to substantial amounts of senior debt. Since initial results from
the company's refocused strategy have become apparent, the equity
base supporting the capital structure has increased both from share appreciation
and from new equity investment.
Balance sheet debt (equals balance sheet debt plus 8 times gross rent
expense) of 5.4 times EBITDAR (based on reported results without
adjustments) and fixed charge coverage of 1.2 times for the twelve
months ending July 14, 2001 were relatively high for the assigned
ratings. With significant incremental revenue and cash flow from
refocusing the retail segment and improving efficiencies in the wholesale
segment, together with potential additional new equity, Moody's
believes that risks for debtholders will decrease.
Within the last year, the equity foundation supporting the company's
debt structure has strengthened. First, in March 2001 Yucaipa
invested $50 million for 8.7% of the company and
a 12-month option to invest an additional $50 million at
the then current stock price. Second, the company's stock
price has approximately doubled since January 2001. Deleveraging
through infusions of significant incremental equity could prove beneficial
for the ratings.
With the conventional supermarket industry consolidating towards large
self-distributing national or regional companies, Fleming
has sought other avenues to grow wholesale revenue. Wholesale revenue
grew in 2000 compared to the previous year for the first time in many
years. The company has won distribution contracts with non-traditional
retailers such as the $4.5 billion contract with Kmart or
smaller contracts with others. However, since Fleming's distribution
margins for non-traditional customers are often less than for conventional
supermarkets, Moody's believes that it will be important for the
company to find financially solid customers and maximize distribution
The company has successfully divested all of its conventional supermarket
chains, which had realized returns well below industry standards.
Going forward, the retail focus will be on supermarket concepts
operating under the trade names Rainbow Foods and Food 4 Less for large
format value supermarkets, and Yes!Less for small format value
supermarkets. In Moody's estimation, the potential returns
from a value supermarket are equal to a well run conventional supermarket.
We expect that currently good returns will attract more competition going
forward from others including Supervalu and Nash Finch (senior implied
Fleming Companies, Inc., with principal executive offices
in Lewisville, Texas, is a leading food distribution company
serving approximately 3,000 supermarkets (including 112 company-owned
grocery stores), 6,800 convenience stores, and 2,000
other retail locations.
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233
No Related Data.
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