ROUNDY'S DEBT RECAPITALIZATION REDUCES INVESTOR PAYBACK

ELLIOT ZWIEBACH

MILWAUKEE -- Roundy's here will remain a private company but without any public debt after a financial recapitalization that saw its major investors accept a lower dividend than they had initially sought.

Sources said Wall Street responded unenthusiastically to the original plan, which called for a much larger dividend for Willis Stein & Partners, the Chicago-based investment group that formed Roundy's Acquisition Corp. to purchase the company in 2002.

Company officials declined to say last week why the amount of the dividend or the bank loan was changed.

However, an industry analyst told SN the recap plan as originally envisioned was designed to give Willis Stein a payback on all the money it has invested, leaving all the remaining capital risk with bondholders and the banks.

Under terms of the bank agreement it ultimately concluded earlier this month, Roundy's will borrow $875 million -- including a $750 million term loan and a $125 million credit facility -- and pay Willis Stein and other investors a dividend of $280 million, rather than the $550 million dividend it had initially proposed, which would have been financed in part by two bond offerings.

"The bond market has been weak, and Roundy's debt under the original proposal would have been $1.1 billion, which would have resulted in higher leverage than any other chain with public debt other than Marsh [Supermarkets, Indianapolis], and the market wasn't interested in that," the analyst explained. "So Roundy's dropped the dividend to $400 million and offered only a $175 million senior note at a floating rate while eliminating a $150 million senior subordinated notes offering.

"But the market didn't go for that either, so Roundy's pulled the notes altogether and increased the term loan to fund a $280 million dividend while maintaining the term loan at $750 million, ending up with debt of about $815 million."

Based on those changes, Moody's Investors Service, New York, affirmed its B2 rating on Roundy's, noting the rating is constrained by "the substantial burden for debt service, capital expenditures, pension contribution and cash taxes," as well as potential competitive pressures.

In Roundy's favor, Moody's said, is its position as the leading supermarket operator in Wisconsin; the progress it has made transitioning to a retailer; and its relatively modern store base and strong relationships with its remaining customers.