KMART REACHES DEAL AVERTING BOND PAYMENT

Byline: Rich Wilner

NEW YORK — Attempting to build a stabler financial structure, Kmart Corp. said Wednesday that it reached an agreement in principle to sidestep the possibility of paying off $548 million in bonds as soon as next month.
The agreement eliminates the “put” feature of the real-estate backed bond issue, which would have forced Kmart to pay off the bonds immediately if the debt ratings fell below investment grade.
Had Kmart been forced to pay off the bonds, it could have been in violation of bank loan covenants and pushed the country’s second-largest retailer into Chapter 11. The cloud of financial uncertainty in recent weeks pushed Kmart stock to a 14-year low and fueled industry uncertainty. On Wednesday, Kmart stock was off 1/8 in heavy trading on the New York Stock Exchange for most of the day, but rallied and closed unchanged at 6 after the announcement was made. The Troy, Mich.-based chain also said it extended the term of its $300 million seasonal bank credit facility and its $199 million bank construction facilities through February 1997. The term of its $2.7 billion revolver will remain in effect until October 1997.
In addition, Kmart eliminated its 12-cent quarterly dividend on its common stock.
“These agreements will resolve the puttable debt issue and allow us to build a financial structure that will provide greater stability and financial flexibility to the benefit of our suppliers and other key stake holders,” Marvin P. Rich, executive vice president, strategic planning, said in a statement.
Kmart was under the gun to reach a deal on the put bonds because Standard & Poor’s said it would downgrade the issue at least one level the week of Jan. 8. A two-level downgrade would have triggered the put option. Now any downgrading has no major affect. Kmart said it expects to close the deal with the bond holders before the end of February. The deal does not include the $95 million principle amount of debt of Kmart’s former units.
The financing restructuring includes an agreement that Kmart’s borrowings will not exceed $2.7 billion and that the Troy, Mich.-based chain will maintain $400 million in balances in its cash management system. Under the deal, if Kmart’s balance falls below $400 million, the borrowing level will be reduced accordingly. Kmart said it will take a one-time charge of $98 million in 1996 related to these agreements.
— Fairchild News Service

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