WAYNE, N.J. -- Grand Union Co. here said it will not make a $36 million interest payment that is due next Monday.
The chain said it will instead use its 30-day grace period to negotiate a capital restructuring with its bondholders and try to obtain a waiver that will keep the chain from defaulting on its bank loans.
If no restructuring is agreed upon by the end of the 30-day grace period, Grand Union said it will be in default under the indenture governing its 12% senior notes due Sept. 1, 2004, and will also be in default on the company's bank facility.
Grand Union said it is optimistic that it will be able to obtain the waiver.
Meanwhile, the company said, it will continue its operations "in the ordinary course and will timely pay all of its ordinary course operating expenses."
Bob Lupo, a high yield analyst with BA Securities, Chicago, said that, with the 30-day grace period, the company will have time to discuss a restructuring with bondholders without being forced to file immediately for bankruptcy protection.
"It looks to me like they're going to look at their capital structure and reduce their debt load," Lupo said.
He noted that it was a good idea to make the announcement ahead of the March 2 due date.
"They addressed the issue and now all the bondholders are trying to get involved in the discussions. It also reassured the trade and their suppliers that they would get paid in a timely manner. It was a good idea to do that." Lupo said in addition to its debt, Grand Union is beset with stores that are older and smaller than those of its competitors. In addition, many of Grand Union's stores in Vermont and upstate New York are pocketed in small resort markets and do not provide strong year-round sales.
"I think they have to address these problems. I give their current management very good marks for what they have done so far. But the capital structure is the issue and they have to address that."
In announcing its decision ahead of the coupon due date, Grand Union ended speculation over whether the company would, or could, make the payment. That speculation got louder last month, when Grand Union retained Salomon Smith Barney, New York, as financial adviser to assist the company in evaluating various financial alternatives, including a capital restructuring.
John Wlodek, a securities analyst with Imperial Capital, Beverly Hills, Calif., said the announcement would remove some of the "volatility" from Grand Union's situation and bring some stability to the chain's bond prices.
He said Grand Union's discussions with bondholders must proceed carefully in the 30-day period, noting it would only take a handful of bondholders to push the company into a bankruptcy filing. However, he said, a contentious standoff between the company and bondholders would be unfavorable for both parties.
J. Wayne Harris, chairman and chief executive officer, said in a statement, "While we have been successful in reducing costs, building comparable-store sales and improving overall operating performance, the company's highly leveraged position continues to constrain our growth. It is important to the future of the company that we take steps now to address our capital structure."
After that announcement, Grand Union said it held discussions with an unofficial committee of bondholders concerning a restructuring. After those discussions, Grand Union decided not to pay the interest due March 2 on its notes. Grand Union said its bank facility provides the company with a revolving line of credit of approximately $68 million. Of that amount, $44 million is extended on letters of credit and $15 million has been drawn at the end of the quarter. The additional funds made available to the company through the bank facility raise the company's total secured credit facility to a total of $250 million.