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Related Issuers
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Rating Action:

MOODY'S LOWERS RATINGS ON KMART SECURITIES (SR. UNSEC. TO Ba3) AND ASSIGNS Ba1 RATINGS TO KMART'S NEW BANK FACILITIES

17 May 1996
New York, 05-17-96 -- Moody's Investors Service lowered the existing ratings of Kmart Corporation and assigned a Ba1 rating to the $1.2 billion term loan and the $2.5 billion revolving credit tranches of the company's new $3.7 billion three year senior secured bank credit agreement. This is the first time Moody's has rated Kmart's credit facility. The company's Not-Prime rating for commercial paper was unaffected by this action and was confirmed. The downgrade of Kmart's existing ratings is based on the security and priority claim that holders of the bank agreement will have and the impact on debt protection for other classes of debt holders.
Ratings lowered are:
Kmart Corporation -- senior unsecured debt, medium term notes, guaranteed industrial development bonds, and its counterparty rating to Ba3 from Ba2; non-guaranteed industrial development bonds, and lease certificates to B2 from B1; unsecured senior debt shelf registration to (P)Ba3 from (P)Ba2; subordinated debt shelf registration to (P)B2 from (P)B1; preferred stock shelf registration to (P) "b2" from (P)"b1."
S. S. Kresge Company -- industrial development revenue bonds to Ba3 from Ba2.
Ratings assigned:
Kmart Corporation -- Ba1 to the $1.2 billion term loan and to the $2.5 billion revolving credit tranches of the company's new $3.7 billion revolving credit.
Ratings not under review and confirmed:
Kmart Corporation -- The company's rating for commercial paper at Not Prime.
Kmart Canada Limited -- The company's rating for commercial paper at Not Prime.
Kmart is currently in the process of revamping its merchandising and operations and restructuring its finances. It has made substantial progress in evaluating its strategy and operations and has begun to cut costs and boost its low sales productivity. However, key to future improvement will be consistent execution of strategies in a difficult and competitive market and it will likely be some time before consistent and substantive improvement is evident.
As part of the repositioning of the firm for the future, Kmart management is planning to issue at least $750 million of convertible preferred stock and execute a new $3.7 billion bank credit facility. Moody's noted that completion of the sale of the preferred offering is expected to be a condition precedent to the closing of the bank agreement. In addition, the bank agreement must be in place to sell the preferred issue. Consequently, the rating agency expects the two transactions to be effected coincidentally. The incremental capital provided by the new Kmart convertible preferred stock will bolster the company's strained financial flexibility and provide a cushion of protection for more senior holders. This additional capital, combined with the new three year bank agreement, should provide Kmart with adequate financing to build inventory especially in the key fourth quarter.
The lowering of Kmart's existing ratings reflects the high level of security pledged to holders under the bank agreement, the likely pledge of security to trade creditors, and the consequent weakening of the position of the existing security holders. The Ba1 rating on both tranches of Kmart's new bank agreement reflects the bank agreement holders' priority claims to the collateral pledged under the agreement in relation to senior unsecured holders. Security under the agreement will be a perfected first priority lien on substantially all material unencumbered assets, including inventory and the real estate of Kmart and its domestic subsidiaries. Moody's ratings reflect its expectation that the collateral under the bank agreement is not likely to be released in the foreseeable future. Provisions in the bank agreement provide for non-pro rata holdings of the term loan and the revolving credit, as well as mandatory prepayment of the term loan from proceeds of certain asset sales or financings. Given the uncertainty surrounding the timing and amount of any such asset sales and financings, Moody's has assigned a Ba1 rating to both tranches of the credit facility. Should the company make substantial progress in its asset sale/refinancing program and thus reduce the term loan more rapidly than anticipated, the rating on the term loan portion of the credit facility could be raised.
Kmart Corporation, headquartered in Troy, Michigan, is one of the largest discount retailers in the United States.

MOODY'S LOWERS RATINGS ON KMART SECURITIES (SR. UNSEC. TO Ba3) AND ASSIGNS Ba1 RATINGS TO KMART'S NEW BANK FACILITIES
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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