Winn-Dixie bonds swoon on accounting goof; Mirant bank debt moves up

By Paul Deckelman and Sara Rosenberg

New York, Feb. 16 - Winn-Dixie Stores Inc.'s admission Wednesday that the troubled Jacksonville, Fla.-based supermarket company had made an accounting mistake last fall when it reported its fiscal first-quarter EBITDA - and thus also misstated its borrowing availability and overall liquidity - sent both bond and stock investors scurrying for the exit doors, with the bonds plunging some 15% on the session, and the stock falling almost 10%. The sharp reaction to the accounting foul-up was seen by traders as one more sign of shaky investor confidence in the company.

In bank debt dealings, Mirant Corp.'s 2003 paper was very active in Wednesday's session and - for a second day in a row - levels moved higher even though no particular news emerged as the likely catalyst for this type of momentum, traders said. That left them pointing to better bond performance as the probable impetus.

Winn-Dixie's 8 7/8% notes due 2008 - which had plunged sharply over several sessions last week all the way down to the low-to-mid 60s from prior levels at 88 following the release of disappointing results for the fiscal second quarter ended Dec. 25 - had appeared to stabilize in the mid-60s over the previous two sessions this week.

But its disclosure of the fiscal first-quarter accounting goof in an amended 10-Q quarterly report filed late Tuesday with the Securities and Exchange Commission sent those bonds careening wildly back downward, along with the company's New York Stock Exchange traded shares.

The bonds swooned to levels as low as 50 bid, 52 offered from Tuesday's close around 65-66 bid, before recovering a little to close at 54 bid, 55 offered, down at least 12 points on the session.

The company's shares meantime nosedived 17 cents (9.71%) to $1.58. Volume of 2.8 million shares was about 12 times the usual turnover.

Winn-Dixie said in its filing that it had miscalculated EBITDA for the 2005 fiscal first quarter ended Sept. 22 by not taking into account certain non-cash charges, as required by its revolving credit agreement. Since net borrowing availability under that agreement is determined in part by an EBITDA test - and the failure to meet certain levels means a $100 million reduction of borrowing capability - the mistake means that in reality its net borrowing availability for the quarter should have been reported as $288.5 million, not the $388.5 million originally announced, and total liquidity as of that date should have also been accordingly reduced by $100 million to $352.5 million instead of the reported $452.5 million.

A trader marveled that "the violent reaction [to the announcement] kind of surprised me, because the revision has no effect on the numbers they just announced."

He said that "the reality is that what they put out - shouldn't have that kind of effect."

The extreme market "vehemence" in response to the disclosure of the accounting error "is telling you how nervous the market is about them."

Another trader said that EBITDA "is a basic accounting number - and these guys couldn't get it right."

That, he said, sends the message to investors that "obviously, their handle on the company doesn't seem to be very tight at the moment."

The admission of so basic an accounting error "says 'we don't know what we're doing'," he continued. "A junior analyst can come up with a correct EBITDA number and these mopes did that [mistake]? And who audited their books, by the way, and that statement they put out?"

Worries about vendors

The first trader said it was not only the bond and stock investors who have reason to be concerned with the competency of the people running Winn-Dixie. The vendors who provide the thousands of different items that are for sale in the company's more than 1,000 stores in the U.S. southeast now have one more reason to "get very nervous about this company, and are going to demand at least a portion, if not a lot, of their payments in cash - and Winn-Dixie doesn't have the wherewithal to do that, which would prompt a [Chapter 11] filing."

To a degree, this is already happening - during the company's conference call following the release of its latest quarterly numbers last week, chief financial officer Bennet Nussbaum acknowledged that some vendors had, in fact, recently toughened their payment terms with the company, although he said the number was relatively limited and none was demanding cash on the barrel head - at least not yet.

"So this is just going to wake up more vendors, and make it that much more difficult for them to continue operating the way they've been operating."

The trader continued "the more you look at things like this, the more you're going to say 'who's going to give them a line of credit?' What vendor is going to sit there and say 'OK, we'll be an unsecured creditor to Winn-Dixie. We don't mind.' Well, that's not going to happen."

He said that if a major vendor were to toughen up their terms or even demand cash upfront before the trucks are unloaded at Winn-Dixie stores, this would produce "financial strains that would mean everybody else" who deals with Winn-Dixie "would have to do it."

In the long run, he said, the company's only hope for extricating itself from its current mess would be to "file [Chapter 11] and clean themselves up" the way retailer Kmart did several years ago; such a step would allow the company to break onerous leases on unproductive store sites and close them down and thus drastically cut its operating costs - the same way that Troy, Mich.-based discount department store operator Kmart did several years ago, which helped the once-struggling company to finally emerge from bankruptcy and become a new darling of Wall Street.

Winn-Dixie's accounting snafu is the latest in a long series of events, stretching back over a year, that have got investors increasingly jittery about the venerable supermarket company - once the regional leader in the southeastern United States, but now clearly losing market share to other regional rivals such as Publix and Food Lion, and to Wal-Mart Stores. When it last week announced its numbers for the fiscal second quarter ended Dec. 25, these included a net loss for the quarter, and a year-over-year decline in sales.

Mirant loans gain

In the bank debt market, Mirant's '03 loan paper closed the day at 73.875 bid, 74.375 offered, up from Tuesday's closing levels around 73 bid, 74 offered, according to a trader. The 73-74 context that was seen on Tuesday represented a gain of about a point and a half from Monday's levels.

The bankrupt Atlanta-based energy company's bonds "were stronger to 80-81," a second trader said. "And people think that it's trading at too cheap a multiple [i.e. about 7.5 times] versus NRG, which is at 8.5x as that company's equity hits 38!"

A trader in distressed bonds saw Mirant's busted convertible notes move up to 75 bid, 76.25 offered, and saw its straight 7.4% notes that were to have matured last year at 80 bid, 81 offered and its 7.9% notes due 2009 at 81 bid, 81.5 offered, both up about a point on the session.

There was no movement in the bonds of the company's Mirant Americas Generating Inc. (MAGI) unit, with the 8.30% notes due 2011 unchanged at 113.

Owens Corning loans end run

Back among the bank debt investors, Owens Corning's paper finally took a breather Wednesday, with little action taking place in trading and levels ending the day unchanged at 107.5 bid, 108.5 offered - a far cry from the frantic week-and-a-half of trading activity and continuously changing market levels.

Owens bank debt had been in the spotlight all last week and early this week as it rallied by about 17 or 18 points between last Monday morning and last Wednesday evening on news that the bankruptcy court hearing on substantive consolidation had ended.

That hearing pitted bank debt holders seeking to preserve the special preference they claim for their claims against bondholders and other creditors trying to collapse the various subsidiaries under which the bank debt was issued back into the parent company, in hopes of gaining a greater return on their investment.

Last Thursday and Friday, the Toledo, Ohio-based building materials company's paper finally started to settle in a little, moving to 105 bid, 106 offered from highs of around 107 bid, 108 offered.

And, then the upward momentum continued on Tuesday, as levels jumped to 107.5 bid, 108.5 offered.

Owens Corning's bonds, meanwhile were quoted around 65 bid on the session, essentially unchanged.

Those of Lancaster, Pa.-based floorcovering maker Armstrong World Industries were likewise seen steady, around 68 bid.

Little asbestos progress

The bonds of companies such as Owens Corning and Armstrong, as well as their shares and bank debt, had risen solidly since early November, pushed up by the election results, which left both houses of Congress solidly in Republican hands. That solidification of GOP control raised hopes among investors that a bill establishing a mechanism for compensating asbestos claimants while also protecting companies from the kind of lawsuit deluge that drove Owens, Armstrong and dozens of other companies into bankruptcy, could finally be passed.

But since then, the bonds have come off their peaks, partly due to the substantive consolidation issue, but also because the early momentum for getting a new asbestos bill passed in Washington seems to have stalled, at least for now.

Although the chairman of the Senate Judiciary Committee, Sen. Arlen Specter (R.-Pa.), has put together a draft proposal for a $140 billion fund supported by companies and insurers facing asbestos litigation, neither Republicans nor Democrats on Capitol Hill have really warmed to his draft. Specter had said in December that he hoped to move quickly on an asbestos bill, hoping to finally resolve an issue which was bottled up in a legislative logjam last year, which ended with no bill.

Specter outlined a timetable that envisioned hearings in January and a vote by the end of that month - but that schedule has now been delayed, as first the Democrats and then the Republicans asked for additional time to consider Specter's proposal.

Some Republicans have said that Specter's bill - which in addition to setting up the claims mechanism would take the compensation of asbestos victims out of the courts - does not provide strong enough protection against claimants "double-dipping" - still managing to both file claims against the fund and pursue cases in court.

Democrats, on the other hand, worry that claimants will have nowhere to go, should the fund run out of money, and none of them have yet signed on to Specter's plan. Sen. Dianne Feinstein (D.-Calif.) was putting together her own draft proposal and said Tuesday that she and Specter would try to "work things out between the two bills."

But Sen. John Cornyn (R.-Tex.), a member of Specter's committee, on Tuesday noted the failure of Senate Democrats to back the chairman's bill so far and warned that while he was working with Feinstein to reconcile the two proposals, if Democratic support was not forthcoming, the GOP senators would have to proceed with their own asbestos bill.

That could set the stage for a reprise of the legislative gridlock that killed the chances for an asbestos bill last year. While the Republicans have a clear majority on both the Judiciary Committee and the Senate, they don't by themselves have the votes to overcome a filibuster or other procedural hurdles the Democrats might erect to stop a Republican-sponsored bill not to their liking on the Senate floor.

The Democrats, meantime, have come under increased pressure from their natural allies in the labor movement, with the AFL-CIO declaring Wednesday its unhappiness with business and some Republicans seeking to "reopen" some concepts which both sides in Congress had essentially agreed on last year in the course of trying unsuccessfully to draft a bill - including allowing return to court if the fund runs out of money.

The labor group sent a letter to all 100 senators protecting the notion of "reopening agreements reached in the last Congress," even though the political circumstances were different, with the Republicans having much weaker control of the Senate, and even though such agreements reached in a prior session have no binding legal force during the following session.

The AFL-CIO letter said there were aspects of the Specter bill that the labor group supports, but said other issues need to be addressed.

FLYi convertibles up

Elsewhere, FLYi Inc., formerly Atlantic Coast Airlines, is not yet in default - but the holding company for Independence Air said early Wednesday that it would skip the coupon payment for its 6% convertible notes. The Dulles, Va.-based airline operator said it expects to make the payment within the 30-day grace period, but there are skeptics.

Still, the convertibles were quoted at the close Wednesday at 45.875 bid, 47.875 offered, versus 44 bid, 46 offered at the open. FLYi's Nasdaq-traded shares also ticked up, adding 12 cents on the day, or 8.45%, to settle at $1.54.

"There's just too much bad news to offset any good news," said a buyside trader, one of the skeptics. "The airline, even with lease negotiations, may still be under water on the revenue side. Their fixed costs are too high to make money."

FLYi, which has $1.3 billion in debt, including leases, was able to restructure its aircraft leases with General Electric Co. in January, and the company is amid efforts for further restructuring, which onlookers expect will include airplane leases. And, analysts said negotiations may be easier now because demand for small jets that FLYi uses to serve its markets in the east and the Midwest has softened, so lessors might be more willing to renegotiate terms, since they wouldn't have a market if they repossessed the planes.

"I think the key in these negotiations is that there is little option for the lessors to re-lease the planes," a sellside trader said. "FLYi has conserved about $5 million cash. If they can successfully restructure even just the lease obligations, everyone gets paid. If not, FLYi has $5 million more than it would have to help get it through bankruptcy."

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