KMART DISPOSES OF ‘PUTS’ CLAUSE IN $550M BONDS
NEW YORK — Kmart Corp. has successfully but expensively removed a daunting financial specter.
The troubled discount giant announced Friday that it completed a deal removing the “put” feature from about $550 million in real estate bonds. The “puts” gave the bondholders the right to demand full payment if Kmart’s debt rating from either Moody’s or Standard & Poor’s dropped below investment grade. Both agencies cut Kmart’s ratings after the Christmas season to junk bond status. The exercise of the puts would have caused defaults of other Kmart debt.
Kmart has also received an extension to February 1997 of $499 million in seasonal bank credit and a construction facility. In addition, the term of the real estate debt and other bank facilities, totaling $2.6 billion, has been set for October l997.
The deal was supposed to close Thursday, but the paperwork held up the conclusion. Kmart stock rose 5/8 to 7 5/8 on Friday on a turnover of 7.5 million shares. It was the fifth most-active issue on the New York Stock Exchange.
Kmart stated previously that the agreements will result in a fourth-quarter charge of $70 million to $100 million in the year ended Jan. 31, 1996. Fourth-quarter figures are expected to be released on March 7.
In addition to the fourth-quarter charge, Kmart expects to pay one-time fees and extra financing costs of about $98 million in 1966 related to the agreement. The agreements will also result in incremental annual interest expenses of about $60 million.
However, eliminating the “put” threat gives Kmart some breathing room to work out longer-term financing arrangements and should help quell on and off rumors of a possible bankruptcy. Kmart has repeatedly denied plans to go bankrupt and last month issued a letter to vendors saying it expects to turn profitable in 1996 and that a “heightening of concern” was unfounded.
Kmart has filed a shelf registration for a the sale of $1.2 billion in debt and equity securities.
According to market reports, Kmart is in the process of forming an investment banking group to raise between $750 million to $1 billion through the sale of convertible preferred stock. Merrill Lynch & Co. is reportedly the lead underwriter.
A spokesman for Merrill Lynch said that, as a matter of policy, the company will not comment until a deal is formally announced. A spokeswoman for Kmart, citing the $1.2 billion shelf offering, said that Kmart is working with investment bankers but has not determined the exact form of any public offering. “But we are moving forward.”
In a statement, Marvin P. Rich, executive vice president for strategic planning, finance and administration, said the closing of the agreements “resolves the puttable debt issue finally and forever. We have already begun work on restructuring or refinancing our bank credit facilities into a multi-year flexible credit line to further enhance our liquidity and financial flexibility.”
Kmart has agreed to repay the principal of the real estate debt by October 1997 or earlier if Kmart is able to refinance the debt. — Fairchild News Service