Investors in Fleming Companies' bank debt are hoping asset sales or even a complete overhaul of the company's Deutsche Bank-led credit will take them out at par. Levels on the existing "B" loan are holding ground, despite news that the company would be terminating its supply contract with its largest customer, Kmart. Traders quoted the "B" paper in the 97 3/4 99 1/4 context due to the lingering possibility that the company's term loan will be taken out within the next three months either through asset sales or through a new asset-based facility. The company has $325 million of term loan outstanding.
During its recent earnings call, Mark Shapiro, Fleming senior v.p. of finance and control, said that the company was working with its lenders to secure a more permanent adjustment to its credit facility either through an amendment or new credit agreement. Shapiro could not be reached for comment last week. Fleming recently amended its credit to increase its debt-to-EBITDA ratio covenant to five times from 4.75 times for the first quarter of 2003. Citing roughly $1.6 billion of inventory and receivables, the company believes that the new agreement would look more like a traditional asset-based facility and would be finalized before the beginning of the second quarter. Fleming is looking to renegotiate its credit to make it more closely tied to assets, explained Andrew Ebersole, a high-yield analyst at KDP Investment Advisors. "They are hoping to get more flexibility," he said, adding that borrowing capacity is currently constrained by the credit covenants.
If the new deal turns out to be only an amendment, lenders are still counting on future asset sales to take down the term debt. "There are asset sales on the plate that will take out a substantial portion of the "B" loan," noted one buysider, qualifying that the asset sales are not "a slam dunk." Fleming officials had initially been looking for about $450 million in asset sales, and while the officials would not provide any guidance, they said the proceeds are likely to be less. "They're trying to sell supermarkets that aren't performing too well," said the buysider.
It has been a volatile month for Fleming bank debt. The company's "B" piece had been quoted in the 97 1/2 98 1/3 range with the start of the new year, according to LoanX, until Kmart announced it would close 326 of its stores, including half its superstores, in mid January. With that announcement, levels for the bank debt paper tripped, slipping into the 93-94 context. The paper rebounded once again following the company's earnings call on Jan. 23. Kmart had been Fleming's largest customer, providing for about 20% of the company's revenues. In anticipation that Kmart's bankruptcy proceedings would have some impact on Fleming revenues, whether it be through store closings or a complete termination of the Fleming/Kmart relationship, Fleming released projections estimating the potential effect. At that time, Fleming believed it would take a loss of 38 cents per share if the contract was terminated.