MORE VENDORS ARE SELLING OFF KMART DEBT
Byline: Rich Wilner and Mark Tosh
NEW YORK — Vulture funds on Friday found more vendors eager to sell their Kmart Corp. debt and get immediate cash for their receivables.
Prices for the receivables held steady at about 80 cents on the dollar, and one broker in distressed securities, claims and receivables, M.J. Whitman, fielded a half dozen inquiries from vendors Friday. In other Kmart developments last week, two factors reportedly decided to reduce their risk on Kmart business beginning the first of the year. Sources said the factors have notified vendors that they would only cover a percentage of orders placed after Jan. 1.
Meanwhile, Kmart said Friday negotiations to sell Kmart Canada are off, and that it’s in the company’s “best interests” to retain the 127-store, $900 million subsidiary.
The decision was surprising, given that Floyd Hall, chairman, president and chief executive officer, told analysts at an Oct. 30 meeting in New York that it looked like Kmart Canada would be sold. He said at the time that a decision would be made within 30 days and that the price would have to reflect the value of the operation.
Of the vendors seeking to sell receivables, Peter Lupoff, principal of M.J. Whitman, said that all of them have been caught in Chapter 11 filings by other discounters and can’t afford not getting paid on paper due in January, February and March. Retail payments, traditionally due on the tenth of each month, are at their peak in December and January because of the volume of goods shipped for Christmas selling. In the last 10 business days, vulture funds have priced the receivables and created a market for the paper.
Kmart last week insisted it has no plans to file a Chapter 11 petition and is current on its payments to the trade and other creditors. In addition, the Troy, Mich.-based discounter has more than $1 billion remaining on its bank lines.
However, the spate of retail Chapter 11s and Kmart’s own financial problems — decreasing margins and red ink — have put vendors on edge. Kmart is not alone. Vendors are buying or considering buying from M.J. Whitman puts on receivables in other struggling retailers, including Hills Department Stores and Venture Stores. Whitman invests in distressed companies.
At the same time, Lupoff said his firm continues to receive a warm response to its newly created put options on retail receivables. The puts, which act as an insurance policy by guaranteeing a minimum payment for receivables in the event of a bankruptcy filing, reflect the continuing move toward more liquid private obligations — such as receivables.
According to market reports, two factors, not wanting to sell their Kmart business, purchased puts on more than $100 million of Kmart receivables for a 7 percent fee. The puts provide protection against a precipitous drop in the price of receivables, which could occur in a Chapter 11. M.J. Whitman said Friday it created the receivable put last month at the request of a factor. Sources said it granted that factor the option to sell the receivable for about 80 cents on the dollar over a year. A sale to a second factor runs for three months.
In other credit action, two factors reportedly decided that beginning Jan. 1, they will lay off some of the risk on Kmart orders to vendors. One factor told its clients that it will only accept 75 percent of the risk; the second was a bit more lenient, at 80 percent, according to reports.
“Obviously, we believe that Kmart will not file Chapter 11 and that we will be able to collect on the receivable when it comes due,” said M.J. Whitman’s Lupoff.
“Some vendors have been caught in the Bradlees, Caldor and Jamesway Chapter 11 filings and cannot risk, no matter the odds, another large receivable being tied up in a lengthy Chapter 11 case,” Lupoff said.
He added that it is to the vendors’ advantage that receivables are becoming more liquid. “These businessmen have to be more concerned about product and delivery and making orders than in monitoring their receivables.”
Commenting on the situation in Canada, Thomas W. Watkins, senior vice president and chairman of Kmart Canada, said in a statement Friday that the company “thoroughly considered” various options for Kmart Canada, including a possible sale of the division, before deciding to retain the business.
“While we did receive expressions of interest in our Canadian operations, we have determined that it is in our best interest at this time to retain these stores,” Watkins said in a statement on Friday.
According to sources, Kmart was prepared to sell the stores to three buyers for a total of $300 million to $400 million. They cited Canadian Tire and Zellers Inc. as among the firms involved in the talks.
Officials of Zellers and Canadian Tire could not be reached for comment. Kmart would not comment on companies involved in negotiations.
The Canadian Kmart units were profitable in 1994 and Kmart hopes the stores will “break even” this year, a spokeswoman said. Same-store sales for the division have improved this year, she added, but she declined to provide a figure.
Kmart’s stock closed at 8 on Friday, up 1/4, on the New York Stock Exchange.
Zellers, a 300-store division of Hudson’s Bay Co., is the leading discounter in Canada, with volume last year of $2.4 billion. Wal-Mart Stores, which acquired 122 Woolco stores last year, has moved into second place with volume of about $1.5 billion.
Kmart Corp. has been struggling to turn its business around and last quarter reported an operating loss of $118 million. Sales trends have improved, but partially as a result of large markdowns, Kmart is taking on discontinued merchandise.
One financial source said Friday it was likely that Kmart was hoping to use some of the cash it raised from the sale of Kmart Canada in its effort to renegotiate terms of $681 million in real estate bonds. The bonds have a put option that allows the holders to demand payment if Kmart’s debt rating drops below investment grade.
Kmart, as reported, has been negotiating with the various bondholders to remove the threat of the bonds being “put” to Kmart for immediate payment.