Kmart arranges $3.7 billion credit package Agreement is called crucial to chances of reviving ailing chain

April 02, 1996|By BLOOMBERG BUSINESS NEWS

TROY, Mich. -- Kmart Corp. said yesterday that it reached agreement with Chemical Bank for a $3.7 billion credit facility that will allow the struggling store chain to clear its largest financial hurdle.

The nation's second-largest retailer will use the lines of credit to replace about $3 billion in debt that comes due next year. The package also will give Kmart $700 million more in credit.

The agreement is key to Kmart's revival, analysts said, because it bolsters the chain's financial flexibility and liquidity, and allows management to now focus on reviving earnings and stores.

"Now they have the ammunition. All they need to do is execute the plan," said analyst Rick Berry of Murphey, Marseilles, Smith. "This is of paramount importance."

Under the terms, approved by Kmart's board, New York-based Chemical Bank will organize a group of new and existing lenders to provide a $2.5 billion revolving credit line and a $1.2 billion, three-year term loan. Kmart said it intends to repay the term loan in a year. Closing is expected by June.

That kind of financing -- term loans, which need to be prepaid over time, and a credit line that can be used as needed -- is common for large U.S. companies.

There are a few catches. Kmart won't get the money until it sells at least $750 million in convertible securities. A sale of convertibles won't be a cinch, investors have said.

Kmart may start the road show for the convertible offering in late May, said Bob Burton, director of investor relations.

The $3.7 billion package will be backed by liens on assets owned by Kmart, such as its stores and U.S. subsidiaries. Kmart can also grant vendors and factors an interest in its inventory. Earlier agreements were unsecured.

The liens will be removed when Kmart pays back $600 million and meets certain financial performance targets, or sees its credit ratings increased to investment-grade levels. Standard & Poor's Corp. and Moody's Investor Service recently slashed Kmart's debt ratings to junk-status.

The agreement was announced after the stock markets closed. Shares in the company closed unchanged at $9.375. Kmart's bonds gained on the announcement. Its 7.950 percent junk bonds due 2023 rose 2 cents to 78.75 cents on the dollar.

Chemical will put up $500 million of its own money. Kmart won't get the remainder until Chemical organizes a group, or syndicate, of banks to chip in the rest, which the company expects.

The loan is performance based, meaning that the interest rate will decrease if the retailer meets certain benchmarks.

"Obtaining this three-year agreement will give us the financial stability and flexibility we need to properly execute our new merchandising, marketing and operational initiatives," said Kmart Chairman and Chief Executive Floyd Hall.

Analysts said the money would most likely pay for inventory as well as sprucing up stores. Mr. Burton said the new credit won't change Kmart's capital spending plans.

"The good news is it provides us all the liquidity we need and returns our focus on our turnaround," said Mr. Burton.

Besides Kmart executives, the company's vendors are probably the most pleased about the new arrangement. Some vendors have expressed doubt about the company's ability to pay its bills in recent months and even hinted that they might stop shipments if cash flow did not improve.

While the new credit lines will help get Kmart out of its financial jam, it will also raise expectations on Wall Street for the company's performance, said consultant Kurt Barnard, president of Barnard's Retail Marketing Report.

"It's a strong vote of confidence from the financial community and squarely places a strong burden on Kmart," he said. "It will have to demonstrate soon that it can turn itself around."

Earlier this month, Kmart reported a small profit from operations compared with a year-earlier loss, snapping a string of 11 quarters of losses or declining earnings. It also plans to cut costs by another $400 million this year.

It also made an agreement with certain debtholders that eliminated their ability to sell back, or "put," the bonds to Kmart if its credit rating fell below investment grade, which it later did. Failure to reach an accord could have forced Kmart into Chapter 11 bankruptcy.

To raise cash, Kmart is looking to sell assets such as its ailing Builders Square and Canadian chains. It's also looking at the sale and leaseback of real estate, as well as the sale of the convertible securities.

Hall, who was named head in June, has made numerous changes in Kmart's operational structure and management team. The retailer must also spiff up hundreds of its 2,172 discount stores, many of which are old and carry dowdy merchandise.

Pub Date: 4/02/96

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