Syndications for Supermarket Chains Surge After Lull Last Year

A $2 billion syndicated loan for the nation's largest chain of grocery stores will put loans to the industry on track to top last year's $5.9 billion in only the first five months of this year.

Bankers said early signs this year point to a steady flow of refinancings and loans backing consolidation that will match or surpass 1996's activity, which had dropped to less than half of 1995's $12.5 billion.

The most recent offering, to industry leader Kroger Co., will come to market this week. A bank meeting for the loan was held in New York on Tuesday, and a second will be held in Chicago today.

Citicorp and Chase Manhattan Corp. are the administrative agents and arrangers for Kroger's loan, with documentation agent Bank of New York Corp., and syndication agent First Chicago NBD Corp.

Groceries are normally a favorite of bankers, thanks in part to their relative stability, as compared to more cyclical industries.

"People eat in good times and in bad," said Peter J. Nolan, a BT Securities managing director active in supermarket lending. "It doesn't go as high as some businesses in the good times and certainly doesn't fall nearly as far in the bad times."

Several large credits to grocery chains have been very well received by the bank loan market so far this year: a $750 million loan for Smith's Food & Drug Centers; a $3 billion loan backing Safeway Inc.'s acquisition of the Vons supermarket chain, and an $875 million refinancing for Ralphs Grocery.

More deals are expected to surface, especially those backing acquisition of smaller regional chains that lack the cost efficiencies and buying power of larger competitors, according to a new study of syndicated lending to the industry.

"Chain stores will continue to dominate the landscape (the top 10 chains account for over 40% of U.S. grocery sales), merging with their smaller brethren for whom the alternative may be a slow, painful death," Andrew Hensel, vice president of loan syndications and trading research at BankAmerica Securities Inc., wrote in the study.

Leveraged deals made up a minority of the loans in the past two years, but the amount of highly leveraged transactions-those priced at over 250 basis points over the London interbank offered rate-grew as a percentage of total volume, according to the study.

The loan for Cincinnati-based Kroger replaces $1.89 billion of debt in two previous facilities and follows the company's recent elevation to investment grade rating of BBB-minus/Baa3.

"Grocery stores have made good leveraged acquisition candidates and that trend continues, and some of them are de-leveraging as a result of those opportunities," said William L. Hartmann, a managing director at Citicorp and head of global loan syndications distribution.

The credit is split between a $500 million, 364-day revolver and a $1.5 billion, five-year revolving facility. Pricing on 364-day portion is initially set at Libor plus 8 basis points on the undrawn portion and 10 basis points on the undrawn portion of the five-year part. Drawn pricing for both is initially set at Libor plus 25 basis points. Commitments are due May 16, with closing scheduled for May 28.

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