Markets & Finance

Fleming Cos. Debt Rating Lowered


On Feb. 5, 2003, Standard & Poor's lowered its corporate credit rating on Fleming Cos. (FLM) to 'B' from 'BB-'. (Please see list below for full ratings information.) The ratings remain on CreditWatch with negative implications, where they were placed on Sept. 25, 2002.

The downgrade reflects the increased challenges Fleming faces in its core wholesale business now that the Kmart Corp. supply contract has been terminated, as well as ongoing difficulties with the integration and exit of other business units. Since the Kmart contract represented about $3 billion in revenues, Fleming will likely need to reduce its distribution capacity, incurring substantial one-time costs, unless it can replace the volume quickly. Although the Kmart business was low-margin and the lower distribution volume will reduce working capital needs, the impact on Fleming's overall operating efficiency is uncertain.

The loss of the Kmart contract comes at a time when Fleming's core business is not meeting expectations due to soft sales at the company's supermarket customers, a promotional retail environment, and higher employee benefit costs. Fourth quarter 2002 earnings (ended December, 2002) were down 25% from earlier expectations.

Moreover, Fleming still needs to fully integrate the CoreMark International Inc. acquisition, complete the sale of its retail assets, and reduce debt. Management's earlier expectations of $450 million in proceeds from the sale of all retail assets are now expected not to be fully realized. The operational shortfalls and lower-than-anticipated asset sale proceeds could hinder debt reduction and earlier anticipated improvement in credit ratios. Standard & Poor's believes management will be challenged to manage these processes smoothly while maintaining focus on executing its core distribution business.

An additional concern is an informal inquiry by the SEC into several matters, including vendor trade practices, its presentation of second quarter 2001 adjusted earnings per share data, accounting for drop-ship sales transactions with an unaffiliated vendor in Fleming's discontinued retail operations, and the calculation of comparable-store sales in its discontinued retail operations.

The company has sufficient room under its $550 million revolving credit facility for further borrowings if needed, although further covenant relief may be required in the future. The company obtained an amendment from its bank group allowing for the sale of the retail operations and providing covenant flexibility. Fleming is currently in negotiations to revise its bank loan agreement to focus on asset-based measures for financial covenants. Fleming has no debt maturities until 2007.

Standard & Poor's will meet with management to assess Fleming's revised business strategy, including its plans to replace lost volume of the Kmart and retail business, prospects for debt reduction, and the SEC inquiry.

Fleming Cos.: Ratings lowered and remaining on CreditWatch with negative implications

Category

New Rating

Former Rating

Corporate credit rating

B

BB-

Senior secured debt

B+

BB

Senior unsecured debt

B-

B+

Subordinated debt

CCC+

B

From Standard & Poor's CreditWire


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