Fleming Debt Rating Lowered

S&P believes that the challenges the company faces in restructuring its wholesale business may weaken cash flow protection measures

On Feb. 27, 2003, Standard & Poor's lowered its corporate credit rating on Fleming Cos. (FLM ) to 'B-' from 'B'. The rating remains on CreditWatch with negative implications, where it was placed on Sept. 25, 2002. The Dallas, Texas-based company had $2 billion of total debt outstanding as of Dec. 28, 2002.

The downgrade is based on Standard & Poor's belief that the challenges Fleming faces in restructuring its wholesale business may weaken cash flow protection measures. Although liquidity for the near term appears sufficient and Fleming intends to reduce debt with proceeds from the sale of its retail assets, debt service costs in relation to cash flow remain high.

Fleming has announced a cost reduction plan, including overhead reduction and the closure of four distribution centers (two of which were dedicated to the Kmart contract, due to terminate March 8, 2003). Cash costs associated with the plan are expected to be $115 million. Noncash charges associated with the plan and other impairment charges may adversely impact the company's previously announced 2002 financial results. The plan is expected to generate $60 million in cost savings on an annual run rate basis by the fourth quarter of 2003.

However, ongoing business trends have typically been difficult to predict, given softness in the retail industry Fleming serves, higher employee benefit costs, and internal challenges. Previously announced fourth quarter 2002 earnings (ended December 2002) were down 25% from earlier expectations.

Fleming still needs to fully integrate the CoreMark International Inc. acquisition, complete the sale of its retail assets, and manage the consolidation of two distribution centers. Moreover, the company has hired PriceWaterhouseCoopers to assist with shareholder lawsuits and a formal SEC investigation into accounting matters. Standard & Poor's believes management will be challenged to manage these processes smoothly while maintaining focus on its core distribution business.

Liquidity should be adequate for the near term, as the company expects to receive asset sale proceeds in the first and second quarters of 2003. Capital spending for 2003 will be reduced, and the company has no debt maturities until 2007. There is sufficient room under the $550 million revolving credit facility for further borrowings, although future covenant relief may be required under the current facility. The company is in negotiations to revise its bank loan agreement to focus on asset-based measures for financial covenants. As the banks are well secured, it is likely Fleming will be successful in obtaining the new facility.

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.

From Standard & Poor's CreditWire