CREDITORS OF KASH N' KARRY MULL RECAPITALIZATION PLAN

MARK TOSH

TAMPA, Fla. -- Creditors of Kash n' Karry Food Stores here are moving ahead with an effort to evaluate the company's proposed recapitalization plan amid indications that many are unhappy with the terms of the proposal.

Some bondholder creditors said they believe Leonard Green & Partners, a Los Angeles investment group that controls Kash n' Karry, did not make a good-faith effort to find a buyer for the company and they felt Green should invest more money into the chain if it cannot be sold.

The creditors have hired legal counsel and a financial adviser to assist in evaluating the company's proposed recapitalization plan, which is standard procedure in such recapitalizations.

Robert Mead, a spokesman for Kash n' Karry, maintained the chain has acted properly.

As reported, Kash n' Karry called off its search for a buyer earlier this month. Instead, the retailer and its principal owner submitted a plan to bondholders that, according to the company, would provide Kash n' Karry the capital necessary to maintain competitive strength.

Kash n' Karry, a 101-store chain with annual sales volume of slightly more than $1 billion, reported a loss of $6.4 million in the quarter ended Jan. 30. The company had hired investment banker Morgan Stanley, New York, late last year to oversee the search for a buyer or equity investor.

Under the proposed recapitalization plan, Leonard Green & Partners would invest $10 million cash into the company. Leonard Green currently owns 61% of Kash n' Karry, but its stake would be reduced to 15.4% under the proposed recapitalization, according to observers familiar with the plan.

At the time the recapitalization plan was disclosed, Ron Floto, chief executive officer of Kash n' Karry, said, "We believe this plan is in the best interest of the company and its bondholders, and will allow us to complete a recapitalization with minimal impact on our operations."

According to sources, Kash n' Karry drew bids from five groups during its search for an equity investor. The five bids ranged from $250 million to $350 million, according to observers. None of the prospective bidders was identified by Kash n' Karry. The spokesman for the chain said the bidders represented both food industry companies seeking a strategic investment and financial investors.

An agreement with the highest bidder fell through, according to bondholders who met with Leonard Green, because of philosophical differences. One observer said Green did not try to sell Kash n' Karry, but instead was looking for an equity partner.

"My view is that this is still an incredibly attractive franchise," the observer said. "No one wants to be [Leonard Green's] partner, but a lot of people would like to own this franchise."

Green's recapitalization plan, which was presented to some 45 bondholders at a meeting in New York early this month, also called for the conversion of about $105 million of subordinated debentures into Kash n' Karry common stock, representing about 84.6% of the chain's equity.

Finally, Green proposed extending the maturities of some senior notes and reducing the interest rates on its fixed-rate senior notes.

A number of bondholders, however, were not satisfied with Green's recapitalization proposal and the decision to call off the search for a buyer. Under Green's plan, the junior bonds are valued at about 52 cents per $1 of face value, according to financial observers.

One Wall Street bondholder said Leonard Green "should put in more money for less of the company" or continue the search for another equity investor. Other observers said they don't believe Green made a good-faith effort to find a buyer.

Mead, the spokesman for the chain, said last week that bondholders often prefer to negotiate in the press.

"I think what you're seeing is a little positioning in the media leading into the negotiation process," he said. The chain has gotten "some good feedback from bondholders," but none of the posturing means anything until the parties sit down and begin negotiating.

"We made what we feel is a very fair and reasonable offer that is in the company's best interest and in the best interests of bondholders," Mead said. The terms are not likely going to be the final terms, but the company and Leonard Green believe they are fair and equitable, he said.

Meanwhile, Kash n' Karry operations are proceeding as normal, the spokesman said.