WAYNE, N.J. -- Grand Union Co. here said last week it intends to make a prepackaged Chapter 11 filing as part of a capital-restructuring agreement reached with a steering committee of the chain's bondholders.
Under the agreement, the chain would eliminate $596 million in bond debt by exchanging its existing 12% senior notes due 2004 for common shares of the reorganized company. By eliminating the bond debt, Grand Union would also eliminate about $72 million in annual interest payments, the company said.
Financial analysts contacted by SN said the proposal is a positive, though not surprising, step for Grand Union and will free up cash for use throughout the company -- including much-needed capital improvements in existing stores.
"Grand Union had too-leveraged a capital structure in too-competitive a market," said Ken Goldberg, a high-yield analyst with Merrill Lynch, New York. "This gives them a more reasonable capital structure with less debt in order to be a stronger competitor. They'll have more free cash flow to spend on their business."
Goldberg said the advantage of a prepackaged Chapter 11 filing is that it is a faster process than a straight filing. He said the chain could emerge as early as this summer. In addition, the prepackaged filing "reduces the amount of uncertainty for employees, the trade and lets [Grand Union] return to normal operations and start investing the proper amount of capital in the business.
"I think it's the only way that they stood a chance of long-term survival in the very competitive region that they're in," he added.
Bob Lupo, high-yield analyst with BA Securities, Chicago, said the financial community anticipated the filing, but the details of the proposed plan are surprisingly "simple and clean."
"The elimination of $596 million of debt should be a huge benefit to the company," Lupo said. "They will save $72 million a year in interest expense. I am very positive about this."
Lupo predicted the company would use the cash formerly earmarked for interest payments as a "booster shot" to upgrade existing stores, rather than build new stores. The restructured company would be a more attractive acquisition target, said the analysts. Don Vallaincourt, a spokesman for the chain, told SN the company's highly leveraged position was holding it back from making necessary improvements in its store base. "This plan eliminated $600 million in notes on which we were paying $72 million a year in interest," he said.
He said it was too early to discuss how the money formerly earmarked for interest would be redeployed. "Our goal was to revitalize our capital-expenditure program," he said. "Clearly, that's part of our plan going forward."
The chain said it expects to obtain formal consent from noteholders by the end of April and file for Chapter 11 protection approximately 30 days later.
This would be the second time Grand Union has filed for bankruptcy protection. The chain emerged from its first Chapter 11 filing in June 1995.
Grand Union said the agreement is subject to formal documentation and the company obtaining a new $300 million credit facility on acceptable terms, to replace an existing $250 million credit facility.
Under terms of the proposed restructuring plan, Grand Union said:
The company's senior notes would be canceled and exchanged for substantially all of the reorganized company's common stock.
The company's existing common stock would be canceled, and, subject to obtaining shareholder and bondholder approval, exchanged for new five-year warrants to purchase approximately 2% of the new common stock at an exercise price of $19.12 per share.
The company's existing preferred stock would be canceled and the holders would be offered the right to receive cash or new common stock.
Trade and business creditors would be unimpaired and would continue to be paid in the ordinary course.
Grand Union executives have been meeting with an unofficial committee of its senior noteholders for the past few weeks in an effort to work out a restructuring agreement. The committee holds more than $275 million of the company's $596 million in notes.