NEW YORK — In what Kmart Corp. called a “key element in its turnaround strategy,” the discounter said Thursday it has an agreement on a $3.7 billion, three-year bank facility to be arranged by Chemical Bank.
It will replace about $3 billion in existing debt and provide the company with $700 million in additional funds. Kmart is expected to close the deal before June 15.
The announcement came after the stock market closed. Kmart shares added 1/4 on Thursday, closing at 9 1/4 on the New York Stock Exchange.
The factoring community is expected to take a positive view of the deal; once it’s completed, it could lead to more liberal credit guarantees on shipments to the discounter. Currently, some factors are guaranteeing 40 to 75 percent of the credit risk on Kmart shipments, leaving the vendors to carry the balance.
David Finkelstein, executive vice president of Century Business Credit, said Thursday the loan definitely was a step forward for Kmart, but he needed more time to analyze its impact.
The loan would consist of $2.5 billion in revolving credit and a $1.2 billion term loan and is conditional upon Kmart’s successful sale of at least $750 million in convertible securities. It has been reported that an underwriting group is being assembled to sell $750 million in convertible preferred stock.
Chemical has committed to $500 million of the facility and will organize a bank group to raise the funds. Under the agreement, the lenders would receive a first lien on substantially all of Kmart’s assets, but Kmart would still be able to grant secondary liens against its inventory to vendors and factors.
The bank liens will terminate when Kmart is granted an investment-grade rating on its debt or reaches certain coverage and leverage ratios and repays $600 million of the term loan.
Although the term loan runs for three years, Kmart said it intends to repay it within a year.
In a statement, Floyd Hall, Kmart’s chairman, president and chief executive officer, said the $700 million in new funds “will ensure that our operations will have more than sufficient liquidity. As a result, we are confident that Kmart will maintain strong vendor support in a highly competitive retailing environment.”
Marvin P. Rich, executive vice president for strategic planning, finance and administration, added, “After reviewing a variety of alternatives, we concluded that an entirely new facility was an important element in our efforts to return to a more traditional and stable financial structure. The new facility will serve as the foundation of our new capital structure as we move ahead with the additional actions to strengthen our balance sheet. Among other things, we are actively exploring the sale of securities, divestiture of noncore assets and sale-leaseback of real estate.” — Fairchild News Service

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