PENN TRAFFIC REORGANIZES; $1.13 BILLION DEBT ERASED

DAVID GHITELMAN

SYRACUSE, N.Y. -- Penn Traffic Co. here said last week it has emerged from nearly four months under bankruptcy protection and is now operating under a reorganization plan that eliminates its $1.13 billion debt.

The company also said it entered into a new $320 million secured credit agreement with a bank group led by Fleet Capital Corp., Boston.

Also last week, Penn Traffic's board of directors met and elected a new chairman, Peter Zirkow, managing director for investment banking at Paine Weber, New York, to succeed Gary D. Hirsch, according to a company spokesman.

Industry analysts said that while the Chapter 11 reorganization has greatly improved the company's debt structure, Penn Traffic still must find a way to survive in fiercely competitive markets where it finds itself pitted against larger, better financed rivals.

The company could not be reached for comment.

The reorganization plan that went into effect last week calls for creditors to receive stock in the company in lieu of cash repayment, the company said. The plan was approved by the U.S. Bankruptcy Court in Delaware in late May.

The new shares of common stock and new six-year warrants will be traded on the OTC Bulletin Board under the symbols "PETRV" and "PETWV," respectively, according to Penn Traffic. The company also said it has a pending application for listing the new common stock and warrants on the Nasdaq National Market System.

In the 13-week quarter that ended May 1, sales declined 14.2% to $615 million, and same-store sales were off 4.5%, while operating cash flow went down 48.8% to $15.4 million.

Analysts said the joint reorganization plan should permit Penn Traffic to take income that had previously gone largely to debt payment and use it instead to upgrade and modernize stores.

"Penn Traffic had borrowed so much money it was forced to defer capital expenditures," said John Wlodek, senior vice president for high-yield bond research at Imperial Capital, Beverly Hills, Calif.

Ted Bernstein, managing director and high-yield bond analyst, Grantchester Securities, New York, said, "As results turned down, Penn Traffic had less to spend on capital improvements. Now, the company is emerging with a downsized balance sheet, and it must try to grow its business."

Wlodek said growing Penn Traffic will not be easy. He said before the bankruptcy the company's Big Bear stores in Ohio had struggled without much success to fend off a challenge from Kroger Co., Cincinnati.

"My guess has always been a major cause of the bankruptcy was difficult competition against Kroger in Ohio," he told SN. "If Kroger wants to take away a region from a company as small as Penn Traffic, it can. Kroger is one of those companies that can spend and spend all day long and then keep spending."

Wlodek also said while many companies see their performance improve after filing for bankruptcy, this was not the case with Penn Traffic. "We may be beginning to see a trend where companies enter bankruptcy and don't get better," he said. He cited the case of Bruno's, Birmingham, Ala., which filed for Chapter 11 in February 1998 and has yet to emerge.

Bernstein said Penn Traffic is facing "very tough competition." But he also said that the chain's top executive, Joseph Fisher, could well be up to the task before him. In November 1998, Fisher, previously president and chief executive officer of Big V Supermarkets, Florida, N.Y., was named president and CEO of Penn Traffic.

"Joe Fisher is the best retailer they've had at the helm in a while," he said. "The company has an essentially new management. It certainly has a new balance sheet. Now, it has to demonstrate to customers that there is a reason to shop there."

In connection with the restructuring, Penn Traffic's formerly outstanding senior notes are being exchanged for $100 million of new senior notes and 19 million shares of new common stock. The company's formerly outstanding senior subordinated notes are being exchanged for 1 million shares of new common stock and six-year warrants to purchase 1 million shares of new common stock having an exercise price of $18.30 a share. In addition, Penn Traffic's stockholders will receive one share of new common stock for each 100 shares of common stock held prior to the restructuring.