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Merged Kmart-Sears Falls Short in Rating

NEW YORK — Edward Lampert may be aware of what it takes to build a strong Sears Holdings Corp., but it wasn’t enough to push the corporate credit ratings of a merged Kmart-Sears into investment grade territory.<BR><BR>On Thursday, ratings...

NEW YORK — Edward Lampert may be aware of what it takes to build a strong Sears Holdings Corp., but it wasn’t enough to push the corporate credit ratings of a merged Kmart-Sears into investment grade territory.

On Thursday, ratings agency Standard & Poor’s assigned a “BB+” corporate credit rating to Sears Holdings Corp., the parent of the soon-to-be-merged retailers Sears, Roebuck and Co. and Kmart Holding Corp. The merger is expected to be completed in early March. The ratings outlook, S&P said, will be negative.

Separately, Lampert, who is chairman of Kmart and founder of ESL Investments, which took the retailer out of bankruptcy two years ago, filed a revealing Form 4 with the Securities and Exchange Commission.

According to the document, filed on Monday, Lampert bought 21.8 million shares of Kmart Holding Corp. at $10 per share, or $218 million. At Thursday’s close of $100, this translates to $2.18 billion worth of stock on paper. The buy brings Lampert’s direct and indirect holdings of Kmart to 84 million shares, or $8.4 billion.

It appears that Lampert exercised a special option relating to the reorganization of Kmart back when it was still in Chapter 11. The original restructuring involved a $293.4 million investment by Lampert’s ESL Investments and Third Avenue Trust. His investment was to be in exchange for stock of the emerged company, Kmart Holding Corp.

Lampert and Kmart could not be reached for comment.

Shares of Kmart have been flat since the beginning of the year, at around $100. Its 52-week high is $119.69, and the low is $26.10.

Regarding the Standard & Poor’s action on Thursday, the agency assigned its “BBB-” rating to the new $4 billion senior secured revolving credit facility co-borrowed by Sears Roebuck Acceptance Corp. (the financing arm for Sears) and Kmart. A recovery rating of “1” was assigned to the loan, indicating the expectation of a full recovery of principal in the event of a default.

According to S&P, “BBB-” is the lowest investment grade rating, while “BB+” represents the highest speculative grade rating.

This story first appeared in the February 4, 2005 issue of WWD.  Subscribe Today.

In a conference call to investors, S&P analyst Gerald Hirschberg said that S&P visited with Lampert to gauge his feelings about Sears Holdings and his plan for the future.

“He had a very good handle on what has to be done to make this combined company successful. He spent a lot of time on what he had accomplished at Kmart and how he went about doing that. He is also very aware of what it takes in terms of a management team to build a strong Sears Holdings Corp.,” Hirschberg said.

The analyst disclosed that he also met with the executives at Sears, and noted that all of them neither underestimated nor overestimated what those challenges would be.

Hirschberg said on the call that the reason for the prospective ratings has to do in part to Sears’ off-mall strategy, which he described as being in its infancy because only a few stores exist. He said it will take “at least several years” before anyone can gauge the viability of the strategy.

In the S&P research update, the analyst pointed to continued profitability pressure on the existing Sears and Kmart businesses from competitors such as Wal-Mart, Target and J.C. Penney.

The report noted that the recovery assessment on the revolving credit facility was based on a “scenario of Sears Holdings Corp. reorganizing as a smaller entity. This could entail selling off entire market or business segments, or a smaller base of Sears mall stores.”

On Wednesday, Sears said once the merger is done, shares of the new company will be listed on the Nasdaq. The stock is currently listed on the New York Stock Exchange.

By Vicki M. Young and Arthur Zaczkiewicz