Campeau Worries Hurt Ralphs’ Bonds

Concerns that Ralphs Grocery Co. will be drawn into the financial morass of its bankrupt sister companies in the Campeau Corp. drove down the junk bonds of the supermarket chain on Friday.

The $400 million in bonds, issued in 1988 when Ralphs became an independent subsidiary of Campeau, fell $5 to close at $81 (per $100 in face value). The bonds, down from as high as $97 last week, have traded at more than $105 in recent months.

Company officials, however, dismissed the possibility that the 143-store Ralphs chain would be hurt by the problems of Campeau’s Federated Department Stores and Allied Stores divisions. The Federated and Allied units, which together make up the second-biggest department store organization in the United States, filed Monday for court protection under Chapter 11 of the U.S. Bankruptcy Code. Ralphs was not included in the bankruptcy case.

Alan Reed, Ralphs’ chief financial officer, called the decline in the company’s bonds “an emotional response” to the department store companies’ bankruptcy filings.

“The bankruptcy has no effect on us,” Reed said. “It’s business as usual.”

Investors, however, apparently have been worried about a few matters. Some concern has stemmed from fear that Ralphs might be required to pay the deferred taxes of Federated Stores, the U.S. retailing arm of Campeau.

Reed said that under a tax-sharing agreement between Ralphs and Federated Stores, the supermarket chain would not be responsible for the parent company’s deferred taxes. He added that even if the agreement was voided, the parent company should have enough assets to cover the tax bill.

Other concerns are related to speculation that Ohio real estate developer Edward J. DeBartolo Sr., an Ohio shopping mall developer, would foreclose on a $480-million loan to Campeau that is secured by Ralphs. DeBartolo has signed a so-called standstill agreement promising not to take action against Campeau until at least May.

Ralphs officials said even after the agreement lapses, DeBartolo is unlikely to try to take over the supermarket chain. They said that such a move could trigger a deferred gains tax bill of more than $200 million.

Barbara Wedelstaedt, a bond analyst at Duff & Phelps in Chicago, added that DeBartolo probably does not want to get directly involved in the supermarket business. She said that he would be more likely to swap the debt he is owed for stock in Ralphs, leaving the current management intact.

Another worry raised has been the possibility of investors filing a fraudulent conveyance suit against Ralphs, claiming that the chain’s assets were improperly transferred when it was set up as an independent subsidiary. Ralphs officials, however, said the company has a strong defense against such a suit and that investors were likely to raise the prospect of legal action strictly as a bargaining maneuver in bankruptcy negotiations.