WINN-DIXIE BONDHOLDERS CONCERNED

Jon Springer

JACKSONVILLE, Fla. -- Holders of bonds issued by Winn-Dixie Stores here huddled last week in hopes of forming an ad hoc committee to represent their interests in the event the retailer continues to struggle.

Q Investments, a Fort Worth, Texas-based investment firm that holds around one-third of Winn-Dixie's $300 million in debt, in a conference call urged bondholders "to get together and speak in a unified voice" to Winn-Dixie management. Scott McCarty of Q Investments, who hosted the call, declined to comment to SN about specific plans. However, observers said the group could petition the retailer for any number of options, ranging from increased disclosure to Chapter 11 bankruptcy.

Winn-Dixie earlier this month reported $400 million in quarterly losses and said some vendors had tightened credit terms. Last week, it told the Securities and Exchange Commission it had miscalculated its borrowing ability by $100 million during the first quarter because it failed to meet earnings covenants of lenders. Its stock and bond trading values have plummeted as a result, leading many observers to believe a crisis is imminent.

"The pressure is building for Winn-Dixie, and it's coming from all sides," Peter Chapman, who covers troubled companies for Bankruptcy Creditors' Service, Fairless Hills, Pa. "This is all very normal for any company that's sliding down that credit-quality curve."

Winn-Dixie earlier this month said its banks waived the earnings covenant through the end of its fiscal year. Yet according to Chapman, bondholders are likely concerned about terms of that deal. In exchange for the extension, Winn-Dixie agreed to engage a financial advisor no later than March 1; pledge approximately $200 million in collateral by March 31; and present lenders with a revised operating plan by May 31, Chapman explained.

"Right now, the banks are unsecured, just like the bondholders. But this would transform unsecured banks into secured banks," Chapman said. "The bondholders are concerned they're going to put the company in hock. If you're a bondholder, you think this is a bad idea because it's giving banks liens on assets that otherwise would pay you. They want to be sure they get paid."

While bondholders may present a variety of recommendations to Winn-Dixie's management, their ability to effect change on the company is limited as long as Winn-Dixie makes timely interest payments, David Maura, senior vice president, First Albany Capital, Greenwich, Conn., told SN. On April 1, the company owes an interest payment of approximately $13 million to holders of its 8.78% notes.

Q Investments, which manages $2 billion in investments, is associated with the Lone Star Funds group that late last year purchased the Minyard's Food Stores chain in Texas, reports said.

"People rattle their sabers for all sorts of reasons, but until Winn-Dixie defaults or fails to pay interest, bondholders haven't much recourse," Maura said, adding that pressure from product suppliers is the more significant immediate concern for Winn-Dixie. The company said it had around $410 million in accounts payable as of the end of its fiscal quarter Jan. 12, and liquidity of around $275, which included the $100 million borrowing restoration.

Peter Lynch, Winn-Dixie's chief executive officer, said in a recent conference call that he had been meeting with vendors individually since joining Winn-Dixie in December, and was inviting all vendors to a presentation where he would detail the company's plans. It was unclear at press time whether that meeting had taken place.

"If the suppliers pull back on credit, things can get very ugly very quickly," Maura said. "Nobody's going to lend you the amount of bank debt you need to go C.O.D. on $400 million in accounts payable."

A source in the vendor community told SN last week that "despite all the disruptions and rumors, it's business as usual" at Winn-Dixie.