By  on January 29, 2002

NEW YORK -- Kmart Corp.'s fall from grace and into Chapter 11 could be documented as easily from its debt downgrades as from the erosion of its stock price.

The blue-lit retailer's spectacular downward spiral may be an extreme case, but it's by no means the only retail drama being played out through credit downgrades in the post-Enron era. As Kmart Corp.'s fortunes fell, so did its corporate debt rating -- seen in successive downgrades from the three primary agencies that track credit worthiness, Moody's Investors Service, Standard & Poor's and Fitch.

Dillard's is now being watched closely following the commencement of a Moody's review on Jan. 14 (see related story).

Moody's, for one, put Kmart's debt on review for possible downgrade on Nov. 6 when its senior unsecured debt was rated at Baa3, the lowest level of investment grade. A little over two months later, on Jan. 22, when Kmart filed for Chapter 11, the discounter's debt stood at Ca. A series of five downgrades totaled 10 degrees on Moody's 21-level rating scale.

Kmart's stock began the year at $4.74 a share and closed at 92 cents on Monday.

In recent weeks, Moody's also pulled down Saks Inc.'s debt rating two notches to B1 with a stable outlook; reduced Gap Inc.'s debt to Baa3, the lowest level of prime ratings, continuing its review for possible downgrade, and put May Department Stores' long-term debt, rated at A1, on review for possible downgrade. Dillard's Inc. is also under the review-for-possible-downgrade microscope with its debt currently one notch below investment grade.

Downgrades, however, represent only incremental moves on the agency's rating scale. A downgrade of one notch for both May Co. and Gap, for instance, would still leave the firms debt five slots away from each other with the former considerably higher.

While issues currently under review for downgrade are in greater peril of being reduced, other issues on which Moody's currently has a negative outlook include Limited Inc., Federated Department Stores, Nordstrom Inc., J.C. Penney Co., Sears, Roebuck & Co., J. Crew and ShopKo Stores Inc.

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