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A&P Convertibles Fall to 3-Month Low as Company Seeks Term Loan

The Great Atlantic & Pacific Tea Co.’s convertible bonds dropped to the lowest in almost three months after the company said it’s seeking a loan that would give lenders a priority claim on its assets in a bankruptcy.

The $165 million of 5.125 percent convertible notes due in June 2011 fell 1 cent to 65 cents on the dollar as of 11:17 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Authority. The debt of the operator of the A&P supermarket chain hasn’t traded that low since July 26.

The convertible bonds, which can be swapped for shares, declined amid concern that the debt would be subordinate to the term loan, said David Marsh, a managing director and high-yield analyst in Greenwich, Connecticut, at broker-dealer Odeon Capital Group LLC. A&P is negotiating with lenders for a term loan backed by unencumbered assets, the Montvale, New Jersey- based company said yesterday in a statement.

“You’re talking about a company that’s trying to turn itself around in the face of extraordinarily stiff competition in their business,” Marsh said in a telephone interview. “Until they can stem the tide in declining same-store sales, I don’t know how they can turn this thing around.”

Revenue fell 9.5 percent in the second quarter from a year earlier to $1.9 billion, the company said in the statement. Same-store sales declined 6.6 percent, and A&P lost $45.1 million before interest, taxes, depreciation and amortization compared with a $42.1 million gain during the year-earlier period.

‘Needed Changes’

“When we do close and fund the transaction this loan will create a significant amount of liquidity and provide us the time necessary to make the needed changes to our business,” Jake Brace, A&P’s chief administrative officer said today in a conference call.

A&P’s $260 million of 11.375 percent secured notes due in August 2015 fell to a mid-price of 68.5 cents on the dollar today, according to broker-dealer RW Pressprich & Co. in New York. The securities, which traded as low as 64 cents today, closed yesterday at 71 cents.

The supermarket chain had $832.1 million of long-term debt as of Sept. 11, according to a regulatory filing. A&P had $181 million available through a credit facility at the end of the second quarter, the company said in the statement.

“From a cash-flow perspective, a new loan could tide them over and provide more certainty that it can meet its debt maturities next June,” said Philip Emma, an analyst at RW Pressprich. “But it doesn’t change the fundamental earnings challenge.”

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