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27 Jun 1997
MOODY'S LOWERS RATINGS OF FLEMING COMPANIES, INC.; ASSIGNS RATINGS TO NEW SENIOR SECURED BANK FACILITY AND TO SENIOR SUBORDINATED NOTES TO BE SOLD UNDER RULE 144A; UPDATES RATING OUTLOOK
New York, 06-27-97 -- Moody's Investors Service downgraded the ratings of Fleming Companies, Inc., assigned ratings to the company's proposed new senior secured bank facility, and rated its proposed senior subordinated unsecured notes to be sold under Rule 144A. The rating actions reflect the challenges Fleming faces in responding to structural changes in the grocery industry, the continued erosion in sales volume, and reduced profits which have been hurt by litigation settlements, as well as Fleming's diversified customer base, nationwide presence, and cost control and reengineering initiatives.
Existing senior secured bank term loan agreement to Ba3 from Ba2 .
Existing senior secured bank revolving credit agreement to Ba3 from Ba2.
Senior unsecured sinking fund debentures, medium-term notes, floating rate senior notes, 10 5/8% senior notes and counterparty ratings to B1 from Ba3.
Senior secured bank revolving credit agreement at Ba3.
Senior secured bank term loan at Ba3.
Senior subordinated unsecured notes to be sold under Rule 144A at B3.
"Fleming is appropriately positioned at the current rating levels. While reengineering initiatives could ultimately yield further improvement in margins, sales and profitability are not expected to return to historical levels. The threat of potential large settlements or damages from pending litigation presents significant event risk."
Fleming's proposed new senior secured bank facility will be composed of a $600 million 6 year revolving credit and a $250 million 7 year amortizing term loan. This facility will replace the company's existing bank facility, and is expected to be secured by substantially the same collateral (Fleming's accounts receivable, inventory and pledge of the stock of most subsidiaries). The new bank loan ratings are subject to finalization of documentation, and reflect the seniority of the facilities, the likely value of the pledged collateral in the event of bankruptcy, and the resulting superior recovery of the bank loan obligations relative to that of the outstanding senior notes.
The proposed new senior subordinated unsecured notes are to be sold in privately negotiated transactions without registration under the Securities Act of 1993 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A. Moody's expects that the proceeds will be used primarily to reduce existing bank term loans and senior indebtedness, with little increase in leverage.
Fleming's customers are diversified by format and geography, with no dependence on large accounts. Its largest customer -- Furr's -- accounted for about $546 million or 3.3% of 1996 sales. The company currently serves more than 3,100 supermarkets throughout the United States and in several international markets. Despite its large customer base, structural changes in the grocery industry have affected the demand for the company's services and created challenges in obtaining profitable business. Some of these changes include new everyday low pricing policies of national manufacturers, which reduce inventory requirements associated with forward buys; the consolidation of the grocery industry, with an increasing concentration of business among chains which self-distribute; and the growth of alternative retail concepts, such as warehouse clubs and supercenters. The operators of smaller grocery stores, many of which are customers of Fleming, will find it difficult to compete successfully against larger combination stores and supercenters. As a consequence, the company's sales fell 6% for the full year 1996 (following 1995's sales decline of 6% on a proforma basis for the Scrivner acquisition) and dropped 8% in the first quarter of 1997.
In response to these challenges, Fleming developed its flexible marketing plans ("FMP"), a new pricing schedule that enables customers to select and pay for services, rather than pay a distribution fee. As part of the program, the customer directly receives all appropriate promotional fees and allowances earned from vendors. However, the company encountered roadblocks in successfully implementing this strategy, including resistance from customers requiring systems changes to benefit from FMP. As a result, Fleming is currently offering flexible marketing plan alternatives, concentrating initially on the 44% of its sales base (17 of 35 divisions) which has been reengineered.
Fleming also launched a reengineering program to lower its cost structure through the consolidation of warehouses and regional headquarters and the reorganization of its business divisions to focus on customer type rather than geography. To enlarge its sales base, the company expanded its retail division, with company-owned grocery stores now representing 22% of sales versus the historical 6% to 7%. Moody's believes that the company faces significant challenges in its efforts to re-establish its food distribution sales base and to grow its business in the highly competitive retail food segment.
In 1996, Fleming's sales performance was again weak, falling to $16.5 billion, and debt protection measures remain modest. However, despite the $1 billion drop in sales, operating profit margins and EBITDA margins were nearly unchanged as a percentage of sales, reflecting improved cost control. Debt has been reduced over the past two years, by $331 million during 1995 and by an additional $193 million during 1996. While operating performance has stabilized, Moody's does not expect profitability to return to historical levels.
Settlements of lawsuits continue to hurt profitability. The settlement of the David's Supermarkets lawsuit resulted in a pre-tax charge of $19.2 million during the first quarter of 1997. In September 1996, Fleming reached an agreement to settle two class action lawsuits stemming from the failure of Premium, a grocery diverter, and recorded a third quarter 1996 charge of $20 million. (This charge was a significant contributor to the approximately $15 million drop in 1996's announced after tax income of $26.7 million.) Among other things, the Premium settlement remains subject to court approval and receipt of releases from Premium investors, including those who might not be bound by the settlement.
Fleming is currently defending itself in several other lawsuits. Furr's, which is 35% owned by Fleming and is the company's largest customer, filed a lawsuit in February claiming that it was overcharged by Fleming under its 10 year supply agreement expiring in 2001. The loss of Furr's business or an unfavorable outcome could have a significant negative impact on Fleming. Moody's will continue to carefully monitor developments in pending litigation, which could require material payments.
Fleming Companies, Inc., headquartered in Oklahoma City, is one of the largest food marketing and distribution companies and supplies over 3,100 supermarkets in the United States. The company also owns 270 retail food stores.
No Related Data.
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