Retailers Tap Debt Markets

MARK HAMSTRA

After a “lost year” that saw investors hoarding cash rather than gambling while the economy was in limbo, a few supermarket companies have begun to lure some of that capital back through a spate of recent bond deals.

Williamsville, N.Y.-based Tops Friendly Markets, for example, recently refinanced its debt with a $275 million bond offering that was increased in size by $25 million due to strong investor interest.

“There is a lot of cash out there that needs to be put to use, and the market has eased up somewhat because there is less uncertainty,” said Marie Menendez, senior vice president at Moody's Investors Service, New York, in an interview with SN. “A lot of people still want to have cash, but they are saying, ‘If I am not going to have cash, then I am going to be really well paid for not having cash.’”

Supermarket companies are proving to be a viable target for that type of investment, as the industry has demonstrated it can retain its profitability even as sales are pressured by the economy, she explained.

“Supermarkets have held up as a relatively stable industry,” she said. “Even at relatively high levels of leverage, there may be good, sound fundamentals beneath that.”

In Tops' case, the company was able to sell $275 million in high-yield notes, due in 2015, most of which will be used to refinance its existing debt, the company said. Tops was acquired from Ahold by Morgan Stanley Private Equity in 2007 for about $310 million.

The new financing, in addition to restructuring its debt, also allowed Tops to repay a dividend of $105 million to its equity investors, Menendez explained. In essence, the private investors were able to use the newly open debt market to realize a return on their equity stake in the chain, which operates primarily in western New York.

Milwaukee-based Roundy's Supermarkets is also deploying that strategy in its recent effort at debt refinancing, reports said. That company, which operates the Pick 'n Save, Copps and Rainbow Foods banners, is paying a $75 million dividend to owners Willis, Stein & Partners, based in Chicago, according to a report in the Wall Street Journal. Roundy's is extending the maturities from 2010 to 2012 on its senior secured credit facility and its revolver, according to other reports.

Roundy's could not be reached for comment on the reports.

“What's interesting about both those deals is that they were both done to benefit the equity holders,” Menendez explained. “In both cases, they had equity holders who had held their investments in those companies for a while, and saw this as an opportunity to take equity out, because both those deals produced dividend returns back for the equity investors.”

Both companies also were able to refinance their entire capital structure, something that might have been attractive to lenders seeking a say in the terms of the bond offerings.

The investors who financed the bond deals had the potential to help renegotiate the debt structure, Menendez explained, as opposed to the “take it or leave it” types of debt investment opportunities that are generally offered by larger companies. When a smaller company like Roundy's or Tops undertakes that type of refinancing, the investor has a lot more say in how the terms and covenants are structured.

One of the factors that allowed those deals to take place, Menendez explained, was the level of confidence in the industry.

“Investors feel somewhat comfortable that [supermarkets] have a relatively stable top line and margin dynamic going on,” she said. “Most of the larger players and the strong regionals have defined their niches pretty well. It's basically going to be the Nos. 4, 5 and 6 in each market that suffer the most — the marginal players.”

Even Bi-Lo, which filed Chapter 11 bankruptcy in March, appeared to have strong fundamentals, Menendez explained, but faced a looming debt maturity at a time when the opportunities for refinancing were almost nonexistent because of the “economic free-fall.”

Other industry companies that have recently gone to the bond market include Unified Grocers, Los Angeles, which this month was able to borrow $25 million from John Hancock Life Insurance. The offering consisted of 10-year fixed-rate notes at 6.82%.

Tops' notes were higher yield, at 10.13%, maturing in 2015, and the offering was among a flurry of high-yield bond deals that have taken place in recent weeks.

One observer, who asked not to be identified, noted that the investor interest in supporting bond deals could play in the favor of some of the supermarket companies who may be seeking a buyer, such as Penn Traffic, the Syracuse, N.Y.-based operator that filed bankruptcy earlier this month.

“They couldn't get financing, so maybe they figured they would try to sell to someone that can, now that the debt market has opened up,” the observer said.

Menendez pointed out that the increase in bond offerings does not necessarily indicate that any more merger and acquisition activity is in the pipeline.

“The financing may be there, but is there a compelling franchise or real estate opportunity?” she said. “Those are the two reasons people buy retail companies.”