Fitch Ratings has affirmed Fleming Companies’ ‘BB+’ rated secured bank credit facilities, ‘BB’ rated senior unsecured notes and ‘B+’ rated senior subordinated notes, removing them from Rating Watch Negative where they were placed on 22 January 2002 following a Chapter 11 bankruptcy filing by Kmart Corp, the supply company’s largest customer.
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Fitch Ratings also assign a ‘B+’ rating to Fleming Co.’s pending US$260m senior subordinated notes due 2012. Proceeds from the issuance will be used to redeem the company’s US$250m 10.5% senior subordinated notes due 2004 when callable in June. The rating outlook is negative.
The ratings reflect Fleming’s position as the largest food wholesaler in the US, its improving financial profile and its repositioned retail strategy. The ratings also consider the company’s relationship with Kmart as well as its appetite for acquisitions and heavy debt burden.
While the bankruptcy filing of Kmart, which represented nearly 20% of 2001 revenues, has negatively impacted Fleming’s anticipated revenue growth, its revenues from Kmart are expected to increase in 2002 to about US$3.6bn from US$3.1bn in 2001. This revenue growth is expected as 2002 will be the first full year working with Kmart. There will also be lost sales from the 284 Kmart stores due to be closed, however, as well as the impact of more conservative sales plans in operation at the remaining Kmart stores.
The company’s wholesale distribution business continues to serves nearly 12,000 supermarkets, supercenters, discount and convenience stores throughout all 50 states from its network of 35 distribution centers. In addition, due to the low-margin nature of the Kmart relationship, the impact on Fleming’s profitability from the Kmart bankruptcy is modest.
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By GlobalDataAs part of its 1998 restructuring initiatives, Fleming closed or consolidated 12 distribution centers and refocused its retail efforts around the price-impact supermarket format, closing 200 conventional supermarkets. As a result, Fleming’s financial profile has improved with leverage (measured by total debt plus eight times rents to EBITDAR) improving to 4.7x in 2001 from a peak of 5.3x at year-end 1999 and EBITDAR coverage of interest and rents improving to 2.1x from 1.8x over the same period.
Of ongoing concern to Finch is the company’s acquisition activity, which has resulted in incremental borrowings. While each of the acquisitions is individually small in size and has expanded operations, the level of activity is somewhat aggressive, spending US$121m on acquisitions in 2001. While Fitch Ratings expects Fleming to continue to pursue opportunistic acquisitions, it expects that they will be financed in a way that would not compromise the company’s ability to meet its financial targets, which are commensurate with the assigned ratings.
The negative rating outlook reflects the uncertainty as to the achievement of Kmart sales levels and the ultimate nature of Fleming’s agreement with Kmart, as Fleming’s contract with Kmart has not yet been confirmed in the bankruptcy process. Also of concern is the possibility for additional Kmart store closures, beyond those already announced.
