MOODY'S INVESTORS SERVICE REVISED ITS RATING OUTLOOK ON FLEMING COMPANIES INC. TO POSITIVE AND CONFIRMED ALL RATINGS
Moody's Investors Service revised its outlook on the ratings for Fleming Companies Inc. to positive and confirmed the existing ratings as follows:
Senior Implied Rating B1
$804 million secured syndicated bank facility Ba3
$300 million 10.625% senior notes, due 2001 B1
$53 million Medium Term Notes B1
$250 million senior subordinated notes, due 2004 B3
$250 million senior subordinated notes, due 2007 B3
The positive rating outlook considers the achievements to date in executing the strategic repositioning program that the new management team at Fleming outlined in December of 1998. Return on sales and assets have been weak, and we believe there is only a modest equity cushion to support bondholders in a distressed scenario. An upgrade of the ratings over the next twenty four months is possible if the company achieves improvement in returns in both its wholesale and retail operations, without significantly increasing debt from current levels.
The ratings continue to reflect Fleming's high financial leverage, substantial refinancing requirements over the next two years (approximately 35% of long term debt, exclusive of capital leases, is due by the end of 2001), the ongoing structural changes in the food retailing, and the relatively low returns that Fleming is achieving. The ratings also consider the significant revenue declines that Fleming has experienced in recent years, as well as the challenging customer relationships and the associated litigation. The ratings are supported by Fleming's position as the second largest national food wholesaler, the geographic diversity of its operations, and the success that management has had to date stabilizing the slide in revenues and rationalizing the company's distribution and retail operations.
The Ba3 rating on the secured syndicated credit facility recognizes that the facility is secured by all of the company's and its subsidiaries accounts receivable and inventory and subsidiaries guarantees. We believe that the collateral provides the lenders good protection in a distressed scenario but also recognize that trade payables support close to 80% of the company's inventory.
The B1 rating on the senior unsecured notes, due 2001, recognizes that while the notes are guaranteed by the company's subsidiaries, they are effectively subordinated to outstandings under the secured credit facility. The sizable amount of subordinated debt in Fleming's capital structure has supported the rating on the senior unsecured notes.
The B1 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 rating considers that the guarantor subsidiaries' liabilities are nominal (the subsidiaries represent less than 3% of Fleming total revenues).
The B3 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.
In December of 1998, Fleming's management outlined a strategic repositioning program that is intended to stabilize and ultimately improve the company's declining financial performance. To date management has made significant progress in achieving its plan, particularly in the wholesale operations. We believe that the slide in wholesale revenues will likely stabilize in the intermediate term based on the retention of wholesale revenues through the rationalization of the distribution operations to date, and the new wholesale revenues captured in this competitive environment. We expect that the consolidation of the distribution operations will lead to better operating efficiency, but we believe improving return on investment will require increased asset utilization.
We expect that Fleming will be challenged in turning around its retail operation, and believe that the divestiture of poor performing chains will enable management to better focus on those operations that are retained. We anticipate that the divestiture of additional retail operations will occur over a one year time frame. We will look to see progress in reversing the weak sales performance in retail operations and improving trends in operating margins to demonstrate the likelihood of successfully turning these operations around.
The company carries a substantial debt burden as it undertakes this sizable strategic repositioning. Total debt is 3.9 times trailing EBITDA, which we believe, is high for a food wholesaler. We note that EBITDA is 2.5 times interest expense, but EBITDA less capital expenditures is tight at 1.2 times interest. We expect leverage measures will improve over the intermediate term, but note the company has a significant liquidity event with the maturity of the $300 million senior notes in December 2001. We believe that the company's ability to undertake an orderly refinancing of this debt maturity will be directly related to its ability to demonstrate progress in its strategic repositioning program.
Fleming Companies Inc., headquartered in Oklahoma City, Oklahoma, is a leading food marketing and distribution company serving approximately 3,000 supermarkets in 42 states, including approximately 260 company owned stores.
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