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05 Mar 2001
MOODY'S ASSIGNS RATINGS OF Ba3 TO SENIOR UNSECURED NOTES AND B2 TO CONVERTIBLE SENIOR SUBORDINATED NOTES OF FLEMING COMPANIES INC, UPGRADES ALL OTHER RATINGS. OUTLOOK IS STABLE.
Approximately $1.67 Billion of Debt Affected.
New York, March 05, 2001 -- Moody's Investors Service assigned a Ba3 rating to the proposed $300
million senior unsecured notes (due 2008) and a B2 rating to the proposed
$100 million convertible senior subordinated notes (due 2009) of
Fleming Companies, Inc. Moody's also upgraded all existing
ratings as follows:
$754 million bank facility to Ba2 from Ba3,
$300 million 10 5/8% senior unsecured notes (due 2001)
to Ba3 from B1,
$ 17 million medium term notes to Ba3 from B1,
$250 million 10 ½% senior subordinated notes (due
2004) to B2 from B3,
$250 million 10 5/8% senior subordinated notes (due 2007)
to B2 from B3,
Senior implied rating to Ba3 from B1,
Long term issuer rating to B1 from B2.
Moody's will withdraw the rating on the senior unsecured notes maturing
in 2001 once the proposed transactions have been completed. The
rating outlook is stable.
Funds from the proposed new issues, a $50 million equity
infusion, and proceeds from assets sales will be used to replace
the senior unsecured notes maturing in 2001and to make investments for
servicing a significant new long-term distribution contract with
Kmart Corporation. Kmart (senior unsecured rating of Baa3) is the
nation's second largest discount retailer.
The ratings recognize Fleming's new 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 reflect that the incremental
capital, partially funded by new equity, allows the company
to invest in a long-term contract with an important retailer.
Divestiture of the company's weak conventional retail chains also benefits
However, the ratings consider the company's leveraged financial
condition in comparison to its most important retail and distribution
competitors and that players within the fragmented food distribution industry
fiercely compete to poach each others customers. The ratings recognize
Fleming's new dependence on Kmart's fortunes since the Kmart account will
eventually contribute almost one-quarter of the company's revenue.
The pressure to continually find non-traditional customers to replace
clients lost in the consolidating supermarket industry also impacts Moody's
view of the risks facing the company.
The Ba2 rating of the bank loan (comprised of a $600 million revolving
credit facility and a $154 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. Moody's notes that the bank
facility was recently amended to permit the company to use the excess
proceeds to pay down credit facility (versus the term loan) in return
for higher pricing.
The Ba3 ratings of 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 Ba3 rating on the medium term notes considers that the notes are senior
unsecured obligations of Fleming and are not guaranteed by subsidiaries.
While these notes are structurally subordinated to the subsidiaries' creditors,
the guarantor's liabilities are nominal. The remaining small balance
on these medium term notes will amortize through 2003.
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.
The stable outlook reflects Moody's opinion that, while the potential
strategic and financial benefits of Fleming's business plan exceed the
risks over the longer term, the company confronts significant shorter
term challenges in satisfying its wholesale clients and refocusing its
Fleming will supply all of Kmart's perishable and non-perishable
grocery items over ten years. Annual revenue to the company should
grow to $4.5 billion by 2003. Fleming will also have
access to Kmart's lower cost general merchandise goods and the increased
volume should provide purchasing economies of scale for the benefit of
all of the company's distribution customers. Moody's anticipates
that, if the supply contract with Kmart proves successful,
Fleming will be in a good position to win significant distribution business
with other non-traditional customers.
With the exception of the profitable Rainbow Foods concept around Minneapolis,
the company has already divested or committed to sell the other conventional
supermarket operations. Going forward, the company's retail
focus will be on both large format value supermarkets operating under
the trade names of Food 4 Less and Fresh 4 Less and small format value
supermarkets operating under the trade name of Yes!-Less.
Moody's observes that the value supermarket segment has attracted the
attention of other industry players and expects that currently superior
returns will attract more intense competition going forward.
The Yucaipa Companies has agreed to invest $50 million for new
equity in Fleming. Over the next 12 months, Yucaipa will
have an option to invest an additional $50 million in Fleming.
Yucaipa also recently invested in Kmart. Moody's notes that Yucaipa
has an established history of making profitable investments in supermarket
Adjusted debt (equals balance sheet debt plus 8 times gross rent expense)
of 5.6 times EBITDAR (based on reported results without adjustments)
and fixed charge coverage of 1.0 times for the twelve months ending
September 30, 2000 were relatively high for the assigned ratings.
With significant incremental revenue and cash flow together with divestiture
at reasonable multiples of the company's poorly performing retail chains,
Moody's believes that the new strategy will meaningfully reduce the risks
to debtholders. Moody's will monitor the company's progress in
improving debt protection measures through implementation of its retail
and distribution strategy.
Fleming Companies, Inc, with principal executive offices in
Lewisville, Texas, is a leading food distribution company
serving approximately 3000 supermarkets, including 189 company owned
grocery stores, 3000 convenience stores, and 1000 other retail
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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