Safeway Offer to Redeem High-Priced Debt Might Ultimately Save Millions in Interest

Safeway Inc.'s planned redemption of its highest priced debt should save the company an estimated $50 million in interest costs annually starting in 1992, according to Sheila O'Connell, a Duff & Phelps/MCM analyst.

The supermarket chain yesterday announced plans to redeem all of its outstanding 14.5% junior subordinated debentures due 2006 on Nov. 25.

First National Bank of Boston, trustee for the debentures, will mail notices to debenture holders shortly, the company said.

Safeway originally issued more than $1 billion of the debentures in 1986, company spokeswoman Melissa C. Plaisance said. It subsequently redeemed $539 million in October 1987 and has purchased $175 million on the open market since mid-July. About $390 million of the original $1 billion-plus issue remains outstanding.

Ms. Plaisance emphasized, however, that the amount outstanding constantly changes. The company plans to continue purchasing the debentures on the open market until the redemption date.

Safeway netted $341 million from an April equity offering. In addition, the company recently reached agreement with its banks on $1.4 billion worth of facilities due 1997.

The company plans to use cash on hand and other financing instruments yet unidentified to deem the 14.5% debentures, Ms. Plaisance said.

Safeway's financial outlook has improved "substantially" since 1986, she noted. Since that year, Safeway has sold a number of underperforming assets and focused on its nine remaining divisions, Ms. Plaisance said.

Safeway Inc., among the world's largest food retailers, operates more than 1,100 stores. Most are in the Mid-Atlantic and Western states, with some in western Canada.

Ms. Plaisance added that Moody's Investors Service recently upgraded the company's senior debt to Ba1 from Ba3 and its senior subordinated debt to Ba3 from B1. Duff & Phelps also recently raised the company's senior subordinated debt to BB from B-plus.

"We are one step away from being investment grade," she said.

The high-yield market overall yesterday weakened during the morning but edged up to unchanged by yesterday afternoon. One high-yield deal, a $150 million senior note issue by Varity Corp., will be priced Monday and issued Tuesday, a company spokesman said.

While they lagged Treasuries, high-grades were up about 1/4 point.

Among yesterday's investment grade issuers was Commercial Credit Co., which issued $200 million of 6.950% notes due 1994. The noncallable notes were priced at 99.93 to yield 6.975% or 70 basis points over comparable Treasuries. Morgan Stanley & Co. managed the offering. Moody's rates the notes A2, while Standard & Poor's assigns an A.

Willamette Industries Inc. issued $150 million of 9% debentures maturing 2021. The noncallable debentures were priced at 99.78 to yield 9.021% or 117.5 basis points over comparable Treasuries. Goldman, Sachs & Co. and Salomon Brothers are co-managers, a Goldman spokesman said. Moody's rates the debentures A3, while Standard & Poor's assigns an A.

As for yesterday's ratings, Standard & Poor's upgraded to B-minus from CCC-plus the subordinated debt ratings of Penn Traffic Co. and its units Big Bear Stores Co. and P&C Food Markets Inc.

The action affects $168 million of Penn Traffic's subordinated debt, $165 million of Big Bear's, and $185 million of P&C's. The agency also raised its rating on Big Bear's $150 million of senior unsecured notes to B from B-minus. Standard & Poor's affirmed Big Bear's and P&C's CCC preferred stock ratings, affecting $15 million of Big Bear's preferred and $26 million of P&C's preferred.

The agency removed all ratings from CreditWatch. The ratings had been placed on CreditWatch with positive implications on June 18.

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