Fleming falls on CEO's ouster; Overseas Shipholding sails with drive-by deal

By Paul Deckelman and Paul A. Harris

New York, March 4 - Fleming Companies Inc. bonds slid on Tuesday as the Dallas-based grocery wholesaler announced the abrupt departure of chairman and chief executive officer Mark Hansen and the selection of interim replacements. In that same grocery sphere, Dutch-based supermarket operator Royal Ahold NV's bonds gyrated around at lower levels, as U.S. authorities subpoenaed documents as part of their probe into accounting irregularities at the company and its lenders froze Ahold's credit line.

In primary market activity, Overseas Shipholding brought a quickly marketed $200 million offering into port, while another nautical name, General Maritime Corp., prepared to hit the road Wednesday with a $250 million 10-year deal.

And Dole Food got set to open the can on a two-part $450 million deal - two different structures from two separate issuers - to finance the LBO by DHM Acquisition Co.

Back in the secondary market, Fleming late Monday night announced that Hansen, who had held the top posts at the Number-1 U.S. wholesale grocery products distributor since 1998, had resigned, effective immediately. He is being replaced on an interim basis as CEO by a board member, Peter S. Willmott, while another board member, Archie R. Dykes, will serve as non-executive chairman of the board. Fleming has retained a search firm to find permanent replacements.

The wording of that section of the announcement dealing with Hansen's departure - "The Board of Directors concluded that a change in the management of the company is necessary" - left no doubt as to what had transpired. News reports quoted analysts as opining that Hansen had "overextended" the company with a string of acquisitions that Fleming is still struggling to integrate, and had pursued various unsuccessful strategies, including the transformation of its retail division to aim at the low-price market; the retail division steadily lost money and is now up for sale.

Besides getting out from under the unprofitable retail business, Fleming's new leadership has to also cope with bringing down a sizable debt load; loss of revenue from the demise of its supply agreement with its biggest single customer, the bankrupt Kmart Corp.; and a Securities and Exchange Commission investigation of the company's accounting practices.

While the investment community generally felt that it was time for new leadership, the uncertainty that followed Hansen's abrupt beheading pushed its bonds sharply lower.

Fleming "got beat up," a trader said, quoting the company's 10 1/8% senior notes due 2008 - which had closed Monday at 57 bid/59 offered - as having opened Tuesday after the announcement of Hansen's ouster at a wide 50 bid/58 offered, before coming part of the way back to end at 54 bid/58 offered. He saw Fleming's 10 5/8% subordinated notes due 2007, which ended Monday at 30 bid/31 offered, as having opened Tuesday offered at 29, "with a 10 bid heard out there, just for kicks," before settling in at 24 bid/26 offered. Fleming's 9 7/8% subordinated notes fell to 22 bid/24 offered from prior levels around 26 bid/28 offered.

Fleming shares, meantime, were down 12 cents (5.66%) to $2 even on the New York Stock Exchanges, on volume of 2.1 million shares, double the norm.

At least some of Fleming's problems can be linked to the woes of its largest customer, Kmart, which in 2001 signed a multi-billion-dollar contract to buy grocery items and other packaged products from Fleming, and which at one point accounted for fully 20% of the distributor's revenues. After the Troy, Mich.-based discount retailing giant filed for Chapter 11 in 2001, Fleming attempted to diversify so as to soften the blow from the anticipated loss of business, but it was still hurt by last year's initial move by Kmart to close over 240 of its stores and the follow-up closure of more than 300 more announced earlier this year. At the beginning of February, the two companies announced that they had decided to terminate the once-lucrative supply contract.

While Fleming struggles with life after Kmart, Kmart is meanwhile trying to cut its expenses and reorganize itself in hopes of emerging from Chapter 11 by April 30. The retailer on Tuesday reiterated that it was still aiming for that goal; it also said that it would set aside 10% of the estimated 500 million new shares that it will issue post-reorganization to lure executive talent to the reorganizing company and to give them an incentive to stay with Kmart. The remainder of the new shares will go to the creditors, including Kmart's bondholders, with the current stockholders left frozen out. Kmart officials also vowed that the corporate culture of the reorganized company would be changed to stress more financial controls as a means of preventing a repeat of its bankruptcy debacle. Kmart's president and CEO, Julian Day, told reporters Tuesday that "the days when this company operated by the seat of its pants" were over.

On Tuesday, Kmart's bonds were quoted as continuing to languish at bid levels around 14-16. "That's pretty much a dead name," a trader said, "nothing shaking there."

One area where things were shaking was in the bonds of Royal Ahold, the international supermarket giant which operates the Stop & Shop, Giant and Bi-Lo grocery chains in the U.S. Its bonds fell sharply over several sessions last week on revelations of accounting irregularities at its U.S. Foodservice unit and the consequent resignations of its CEO and chief financial officer, but those bonds had been bouncing back late last week and on Monday.

On Tuesday, however, the rebound came to a close; Ahold said that the Justice Department had issued subpoenas for documents relating to most of its businesses, widening investigations into the alleged accounting irregularities. The SEC and European officials are also looking into the operations of Ahold, the world's third largest retailer. Ahold also announced that its lenders had frozen the undrawn portion of its existing $2 billion credit facility, of which about $550 million had been drawn. Ahold said it is currently meeting all of its financial commitments, and further said that it remains in negotiations with the lenders on a new €3.1 billion credit package, at least some of which will be a secured facility.

The latest development caused Ahold's NYSE-traded shares to retreat 43 cents (10.59%) to $3.63 on volume of 8.7 million shares, about seven times the norm.

On the bond side, Ahold's 6¼% notes due 2009 opened at 78 bid/80 offered, and ended around that same level, but not before they had first dropped to 75 bid/78 offered. Its 8¼% notes due 2010 fell to 76 bid/78 offered from prior levels at 79 bid/81 offered, while its 6 7/8% notes due 2029 fell as low as 66 bid/69 offered before bouncing back to end at 69 bid/71 offered, still down about two points on the day.

Another supermarket operator, Roundy's Inc.'s 8 7/8% notes due 2012 were quoted around par, up several points from recent levels, an observer said.

Outside of the supermarket and retailing field, traders saw little real movement in Echostar DBS bonds. The Littleton, Colo. Satellite operator reported a wider fourth-quarter loss, but said that EBITDA for the quarter was up 13% to $193 million and jumped 58% for the year to $806 million, ahead of guidance, and is predicting better free cash flow in 2003.

Still, a market source said "it was up a little, but not that much," quoting Echostar's 9 3/8% notes up half a point at 107 bid.

And Allegiance Telecommunications Inc.'s 11¾% notes due 2008 lost 3½ points to close at 17 bid, after the Dallas-based telecom operator reported that it lost $15.7 million and warned that its auditors may attach a warning that they doubt whether it can continue as a going concern to its 2002 report, unless it can sharply slash its debt. Allegiance is faced with an April 30 deadline for cutting its $1.2 billion debt load virtually in half in order to stay in compliance with its bank loan agreement.

Standard & Poor's, noting the company's woes, cut its corporate credit to CC from CCC previously. Allegiance shares dipped nine cents (21.43%) to 33 cents on the Nasdaq on volume of 8.4 million shares, more than triple the usual.

The high-yield primary market picked up the pace on Tuesday as two transactions priced and three new ones took up positions on the forward calendar.

In a deal that one sell-side source characterized as the biggest on the present forward calendar Westlake, Calif.-based fruit, vegetable and flower grower Dole Food announced a two-tranche $450 million Rule 144A high-yield deal to help fund the leveraged buyout of Dole by DHM Acquisition.

The deal will be comprised of an offering by Dole Food Co., Inc. of $375 million of senior notes due 2011, non-callable for four years, and an offering by DHM Holding Co., Inc. of $75 million of PIK notes due 2013, with a call structure to be determined.

The roadshow will begin Thursday. Joint bookrunners are Deutsche Bank Securities and Banc of America Securities. The deal is expected to price on March 19 or 20.

Two additional offerings sprouted up on Tuesday. General Maritime is set to start roadshowing $250 million of 10-year senior notes (B1/B) on Wednesday via JP Morgan. That offering is expected to price on March 14. And the roadshow for iStar Financial Inc.'s $150 million of five-year senior notes will also start in the middle of the present week, with pricing expected during the week of March 10. Deutsche Bank Securities is the bookrunner.

Terms emerged Tuesday on a quick-to-market transaction from New York City-based Overseas Shipholding. Investors hauled $200 million of the cargo ship operator's 8¼% 10-year senior notes (Ba1/BB+) aboard. The notes priced at 99.16 to yield 8 3/8%, in the middle of the 8¼%-8½% price talk. Bookrunner was Goldman Sachs & Co.

And Irvine, Calif. homebuilder Standard Pacific Corp. priced $125 million of 7¾% 10-year senior notes (Ba3/BB) at 99.141 to yield 7 7/8%, at the wide end of the 7¾%-7 7/8% price talk, via Salomon Smith Barney.

Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, told Prospect News on Tuesday that the $1.54 billion inflow to high-yield mutual funds for the week ending Feb. 26 is not necessarily burning a hole in the buy-side's pockets every time they see a new junk bond deal.

"It's funny," Gaffney observed, "you have a day like today, with stocks down 132, and you're really not seeing any kind of overflow into the high-yield market just because all of that cash is there.

"There's a huge disconnect going on between stocks and high yield, and corporates in general.

"I'm not comfortable chasing this market up," the Loomis Sayles portfolio manager added. "There is pressure to get invested, yes. However, the way we run our portfolios we can find other pockets to put it in, whether it's triple-Bs or emerging markets or convertibles. We've got other places to hide than the new deals or the rich double-Bs."

Asked if she had ever seen such a "disconnect" between equities and high yield before, Gaffney stated: "No, I have not seen it before. I think it has to do with the overall level of rates, which are so low. And there is so much pressure to put it to work on the fixed income side."

One sell-side source advised Prospect News to stand by for a continuing steady build-up in the new deal calendar.

"Everyone's trying to get to the markets quick," the official said. "High yield is doing extremely well. Deals will keep coming until we see some back-up in the primary market, and we haven't seen that yet."

This official from the sell-side also seemed to think that high yield investors might presently be holding out to the extent possible.

"I think they are sitting on cash," the source conceded. "They've got a good 5% minimum in their portfolios. But all the money that has been exiting equities is coming into fixed income products, and the money in excess of 5% is quite substantial."

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