Byline: Sidney Rutberg

NEW YORK — The stock market reacted happily Thursday to Kmart Corp.’s announcement Wednesday that it had worked out an agreement eliminating the immediate danger of a default.
Kmart’s stock price jumped 1 5/8 to 7 5/8, a 25 percent increase. The issue topped the most active list on the New York Stock Exchange, with a turnover of 15.5 million shares.
David Finkelstein, of the factoring firm Century Business Credit, said the agreement “removes the sword of Damocles from over the head of Kmart and assures that it will get a full complement of spring merchandise.” However, some analysts remain skeptical and see the latest development as a Band-Aid. As one anonymous factoring executive stated on the question of a Chapter 11 for Kmart: “The question is when, not if.”
Kmart said Wednesday that it had reached an agreement in principle with bondholders of $548 million to eliminate the ‘put’ provisions of real estate bonds. The puts would have become exercisable if one of the major debt rating agencies dropped Kmart’s rating to below investment grade.
On Thursday, Moody’s Investors Service lowered the rating on $4.3 billion in Kmart debt one notch to Baa3 from Baa2, but added that the new ratings were still under review for another possible downgrade. The latest rating is just one notch above junk bond status. The other major agency, Standard & Poor’s, is reviewing Kmart’s debt for a downgrade but said it will not issue a new rating until the week of Jan. 8.
In lowering its rating on Kmart debt, Moody’s said that the weak retail environment will challenge the new management and is likely to prolong the transition period before substantive improvements are realized. On the other hand, Moody’s notes that “there are some early indications that the company’s performance is beginning to stabilize” and that its cash position is strengthening as the fourth quarter progresses. Moody’s also points to the cash saving from the decision on Wednesday to eliminate the 12-cents-a-share quarterly dividend.
In addition, Moody’s cites the agreement on the put bonds, noting that “the risk of a significant claim on cash appears to have been reduced.”
Kmart also negotiated the extension of some of its bank credit facilities. The cost of the changes in the bonds and the bank agreements will result in an after-tax charge of $70 million to $100 million in the fourth quarter.
Analysts point out that the agreement on the put bonds is still tentative and that Kmart will pay a stiff price. Maturity on the real estate-backed bonds has been accelerated to October 1997, and a premium will be paid to bondholders who agree to eliminate the put. Kmart said that as a result of the agreements, it will pay in 1996 about $98 million in fees and additional financing costs and about $60 million in additional interest expenses.
Also, the skeptics believe the operation is still struggling, that Kmart will have trouble raising the cash needed to modernize the stores and that there may not be enough time to do the major surgery that the chain requires. — Fairchild News Service

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