Fleming in bounce; Tesoro up; upsized Rite Aid prices, KB Home also

By Paul Deckelman and Paul A. Harris

New York, Feb. 5 - Fleming Cos. Inc. bonds and shares - which had nosedived Tuesday on the news that Fleming and its biggest customer were ending their supply agreement - bounced a bit on Wednesday, after the company's chief financial officer strongly denied that a bankruptcy filing was under consideration.

Elsewhere, Tesoro Petroleum Corp. bonds and shares were both smartly higher, despite the lack of any fresh news about the petroleum refiner.

In the primary arena, activity picked up on Wednesday as Rite Aid Corp. came to market with its upsized eight-year-note issue, while KB Home - which sold $250 million 7¾% senior subordinated notes due 2010 less than three weeks ago - was back for more, with a $50 million add-on.

Also on Wednesday the investment banks unsnapped a new deal from FastenTech, Inc. so that the accounts could begin having a peek.

Camp Hill, Pa. drugstore chain operator Rite Aid priced an upsized $300 million of second lien senior secured notes due Feb. 15, 2011 (B3/B-) at par to yield 9½%.

Talk on the deal from Salomon Smith Barney came out at 9¾% area on Tuesday, then tightened to 9½% on Wednesday, according to a syndicate source. The deal was upsized from an original size of $200 million Tuesday.

Investors also carried an extra $50 million of Los Angeles-based single family homebuilder KB Home's 7¾% notes due Feb. 1, 2010 over the threshold on Wednesday. UBS Warburg was bookrunner for the off-the-shelf add-on, priced at 99.0 to yield 7.938%. The original $250 million off-the-shelf deal priced on Jan. 17 at 98.676 to yield 9%.

Sources told Prospect News that a few high yield accounts took an interest in the split-rated offering from HCA Inc. of $500 million of 10-year senior notes (Ba1/BBB-). The Nashville based company, the largest U.S. hospital chain - which announced a $102 million fourth-quarter loss on Tuesday, including a $419 million settlement with the federal government over allegations of overcharges and improper payments to doctors - priced its new 6¼% notes at 99.346 to yield 6.339%.

News of a Wednesday roadshow start for FastenTech's $175 million of eight-year senior subordinated notes (B3/B-), via JP Morgan, circulated the market on Wednesday. The Minneapolis-based company, which manufactures and markets specialized fastener systems will price its deal during the week of Feb. 10.

Also on Wednesday price talk of a yield in the 9% area was heard on Cinemark USA, Inc.'s $150 million of 10-year senior subordinated notes (B3/B-). The credits on that deal, via Lehman Brothers, are set to roll on Thursday afternoon.

Price talk also emerged Wednesday on both tranches of Legrand, SA's 10-year senior notes (B1). Talk is 10% area on the dollar-denominated tranche of $400 million while the €200 million tranche is being talked 50 basis points behind the dollar-denominated piece.

Credit Suisse First Boston and Lehman Brothers are joint bookrunners on the offering from the Limoges, France electrical distribution and industrial control and automation services provider. The deal is expected to price Friday.

Cinemark's deal coincidentally is set to price on the same day, Thursday, as the elephantine TRW Automotive four-piece offering of approximately $1.4 billion.

Prospect News asked one of its sell-side sources if smaller deals such as Cinemark face added challenges when the market is preparing to digest offerings such as TRW Automotive, or Crown Cork & Seal Co.'s $1.75 billion, which is set to price next week.

"The smaller deals definitely lose out on some of the focus," this official responded.

"TRW is Thursday, and it sounds like it's doing well. And Crown Cork is a week away, and it helps that they are spaced a little bit apart so people still have time to focus on some of the smaller deals."

When the new Rite-Aid notes were freed for secondary activity, the bonds initially firmed to 102 bid - but by day's end had surrendered most of those early gains to finish at 100.25 bid/101.25 offered, not much changed from their par issue price earlier in the session.

Still, a trader said, "that was the excitement of the day." He characterized overall trading as having a softer tone, apparently influenced by the stock market's failed rally attempt, which came against a backdrop of renewed uncertainty over the brewing conflict between the U.S. and its allies and Iraq, which stands accused of developing forbidden weapons of mass destruction and of possibly having links to international terrorist groups. Although Secretary of State Colin Powell made an elaborate presentation to the U.N. Security Council, seeking to demonstrate Iraq's deliberate non-compliance with the arms inspectors, Germany, France and several other Council members continued to urge caution and suggested further time for the arms inspections.

Stocks have been burdened for weeks by investor uncertainty related to the chances of war, and they initially rallied Wednesday as Powell laid out a strong case for quick action - only to fall back later on, with most major indexes ending marginally lower as it became clear that nothing is yet clear about when - or if - the long simmering controversy will finally come to a head.

In junk bond land, stocks' up-and-down performance translated to a market which the trader termed "sloppy."

But not everywhere.

Fleming's 10 1/8% senior notes due 2008 - which on Tuesday had fallen as low as 62 bid from Monday's closing bid levels around 70-71 were quoted as having bounced almost all the way back Wednesday; the trader quoted them as having risen five points on the session to end at 70 bid.

But Fleming's subordinated paper continued to struggle; its 10 5/8% notes due 2007, which had fallen on Tuesday to bid levels around 40-41 from Monday's 48, continued to languish at those lower levels and actually lost a little ground, to around a wide 39 bid/44 offered. The trader said that this seemed to be the most active Fleming issue.

A distressed-debt trader pegged Fleming's senior paper, such as the 10 1/8s and the company's 9¼% notes at 70, saw the 10 5/8s around 40, and quoted Fleming's 9 7/8% subordinated notes due 2012 - which on Tuesday had declined to 35 bid from prior levels at 38 - back up to the 38 mark.

Fleming bonds had fallen Tuesday and its shares had swooned nearly 29% on New York Stock Exchange dealings, following the joint announcement by Fleming and its largest customer, bankrupt discount retailer Kmart Corp., that they had decided to end the two-year-old pact under which Dallas-based wholesale distributor Fleming supplied grocery items to Kmart's far-flung, but troubled network of stores. On Wednesday, the shares were up 14 cents (5.34%) to $2.76.

That rise followed assertions by Fleming's CFO, Mark Shapiro, that any notion that the company might be forced into bankruptcy by losing the Kmart contract was "ludicrous."

He noted that while the then financially healthy Kmart comprised 20% of Fleming's business when the $3 billion 10-year contract was signed in 2001, Kmart's closing of several hundred stores since it filed for bankruptcy last year - and its plans to close several hundred more this year - had pared Kmart down to, at most, 15% of Fleming's business.

The company has taken pains to reassure its stock and bondholders that even though Kmart has been Fleming's largest individual customer, Fleming's customer base is diversified enough that it would be able to survive the loss of the contract. In October, Fleming projected that the possible termination of the Kmart contract would result in a write-off of 38 cents a share, with an expected $30 million in one-time pretax cash charges and $25 million in non-cash charges. Fleming said that loss of Kmart as a customer would result in a $43 million decline in annual EBITDA and LIFO provisions. Shapiro said Wednesday that Fleming would stand by those numbers.

Kmart's bonds, meantime, were seen a point lower, around 15 bid.

Elsewhere, Tesoro Petroleum's 9 5/8% notes due 2012 were quoted four points higher, at 71 bid, while its shares jumped 54 cents (12.27%) to $4.94, on heavy volume of 1.6 million shares.

There was no fresh positive news out on the San Antonio-based petroleum refiner, which last week reported a fourth-quarter loss of $27.7 million (43 cents per share), versus a year-earlier profit of $4 million (10 cents a share).

But on investment-oriented bulletin boards, Tesoro shareholders expressed optimism that rising crack spreads - the difference between what a refiner pays for a barrel of crude oil and the value of the gasoline, heating oil, jet fuel and other products refined from that barrel - might push the value of the company's shares substantially higher over the next few months.

On the downside, El Paso Corp. said it would cut its quarterly dividend from 21¾ cents to four cents (87 cents to 16 cents on an annual basis) in hopes of keeping $425 million of additional liquidity with the company annually, and reducing its balance sheet leverage by 1.5% per year. It also outlined plans to sell $2.9 billion of assets in order to cut debt, but said that it may have to fully draw down its bank credit facilities.

El Paso shares collapsed $1.80 (22.5%) to end at $6.20, and its bonds were also lower; the Texas-based utility operator's 7 7/8% notes due 2012 lost a point to 76 bid.

At another desk, its 7 5/8% notes due 2011 were at 73 bid; its 7¾% notes due 2035 were at 70 bid; its 7¾% notes due 2032 were at 65 bid; and its 6.95% notes due 2007 were at 75 bid, all seen down two to three points on the session.

Crown Cork & Seal Co. Inc.'s several issues of bonds coming due this year and its 2005 bonds were all quoted at the 99-par levels to which the bonds had risen after the Philadelphia-based consumer products container company had announced plans for a recapitalization; on Wednesday, Crown Cork announced plans to tender for those bonds at that par level (see "Tenders and Redemptions" elsewhere in this issue for full tender offer details.)

The company's other bonds were quoted in the mid-70s, slightly higher on the session.

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