Kmart Strikes Deal With Lenders Struggling Discount Chain Eliminates Stock Dividend

Kmart Corp. said it reached an agreement with holders of $548 million in debt and said it will extend the term on some of its revolving credit facilities, giving the retailer breathing room as it attempts to revive its struggling discount stores.

The nation’s No. 2 retailer also eliminated its common stock dividend, a move that should save it $220 million a year.

Kmart has said that if it has to buy back more than $100 million of the debt, and it isn’t able to find a waiver or otherwise resolve the situation, it would default on its revolving credit. That could’ve forced it into Chapter 11, investors and analysts said, because it wouldn’t have enough money to operate.

“Bankruptcy concerns are all but eliminated in the near term,” said Tim Patrick, a bond analyst at NationsBank.

The Troy, Michigan-based retailer said it will take a pretax fourth-quarter charge of $70 million to $100 million to account for the agreements.

The bond settlement eliminates the ability of holders of $548 million of debt to sell back, or “put,” the bonds to Kmart if the company’s credit rating fell below investment grade.

Kmart’s debt is rated “BBB” by Standard & Poor’s Corp. and “Baa2” by Moody’s Investors Service. It is under review for possible downgrade by both companies.

The elimination agreement of the “put” option doesn’t include $95 million of the debt tied to three of Kmart’s former units.

“These agreements will resolve the puttable debt issues 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,” said Marvin Rich, executive vice president at Kmart.

The discount retailer, which operates 2,172 stores, has reported 11 straight quarters of declining earnings or losses as it neglected its stores and was stung by competition from rivals Wal-Mart Stores Inc. and Dayton Hudson Corp.’s Target unit.

All that has led to repeated speculation that Kmart’s financial plight could force it to file for bankruptcy protection, though Kmart repeatedly has denied that it would do so.