NEW YORK — Kmart Corp.’s ability to sell its $1.2 billion multiple shelf registration was not helped Thursday when Moody’s Investors Service rated any future senior unsecured debt issue at Baa3 — the lowest investment grade level.
Moody’s said the provisional rating was on review for a possible downgrade.
The ratings agency placed a Ba2 rating on future subordinated debt and a ba2 on any preferred stock offering. Both these ratings are speculative grade — or junk bond status.
On Dec. 21, Moody’s lowered the retailer’s long and short term ratings and kept them under review for further downgrade.
Moody’s rating and review of the shelf offering is based on Kmart’s recovery plan, its capital requirements to support the plan, its financial situation and the amount of flexibility the company has during its transition.
Kmart has reported 11 consecutive quarters of profit declines, including a $118 million operating loss in the third quarter. The discounter has said its Christmas business was slightly below expectations, with same-store sales rising an estimated 3 to 4 percent.
Moody’s said the poor retail environment will make the challenge facing Kmart’s new management team in implementing its strategy even more difficult and will likely prolong the transition period before substantial improvements are made.
Kmart said last week that as part of its effort to enhance its liquidity and financial flexibility it would “explore other financial alternatives, including the sale of debt or equity securities through a $1.2 billion shelf registration…the possible divestiture of non-core assets and the sale-lease back of certain real estate.”
At the time, several credit analysts said it would be difficult for Kmart to sell the shelf registration because of the low ratings and a mixed outlook for the chain.
Despite keeping the ratings for the shelf registration on review for possible downgrade, Moody’s said the Troy, Mich.-based discounter’s performance was stabilizing. The rating firm said Kmart’s cash position is strengthening as the fourth quarter continues, and it will be further aided by the board’s decision last week to eliminate its dividend.
Kmart Stock rose 5/8 to 7 1/8 Thursday on the New York Stock Exchange.
— Fairchild News Service

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