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Kmart Board Meets; Bankruptcy Seen as Option

Retail: Standard & Poor's intends to remove the troubled discounter from its index of 500 blue-chip U.S. firms.

January 16, 2002|From Reuters

CHICAGO — Kmart Corp.'s board of directors met Tuesday to discuss financial options, possibly even bankruptcy, as the stock of the discount retailer closed near a 34-year low amid concern over its failing efforts to compete against the low prices of rival Wal-Mart Stores Inc.

The nation's second-largest discount retailer has said that it may need additional financing from banks after months of weak sales, especially over the crucial Christmas shopping season. Kmart, already in the middle of a $2-billion restructuring, has said its business plans for 2002 and 2003 are under review.

"I'm not surprised the board is meeting," said Kurt Barnard, president of Barnard's Retail Consulting Group. "If they don't get the credit, the only solution I can see is a Chapter 11 [bankruptcy]."

Under Chapter 11 of the 1978 Bankruptcy Act, a company is allowed to keep control of its operations as it reorganizes its finances and satisfies its creditors.

Jack Ferry, a spokesman for Kmart, said he did not know whether any action would be taken after the board meeting concludes.

Kmart will be removed from Standard & Poor's index of 500 blue-chip companies after the close of trading today because of "lack of representation," S&P said in a statement. The company will be replaced on the S&P 500 Index by Plum Creek Timber Co.

Since the start of the year, Kmart stock has lost half its value. Kmart, which dates back to 1897, has been losing market share to rivals Wal-Mart and Target Corp.

Shares of Kmart, which is expected to report a loss for its fiscal 2001 year, fell 39 cents to $2.45 on the New York Stock Exchange.

The stock started its decline in December when Moody's Investor Services downgraded the Troy, Mich.-based retailer's debt to junk status. Troubles were compounded when Prudential Securities retail analyst Wayne Hood suggested the company may file for bankruptcy if its fortunes do not improve.

On Monday, Standard & Poor's cut Kmart's senior credit and debt ratings. S&P, which also warned of further downgrades, cited worries that the retailer's financial flexibility is eroding and its suppliers are losing confidence.

On Tuesday, prices on Kmart's senior bonds, regardless of maturity, "converged" near 55 cents on the dollar. The activity suggests bankruptcy looks more probable because in bankruptcy, maturity does not matter. Bondholders get paid off based on how high they rank in a company's capital structure.

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