Kmart Reportedly Closing In on Financing Pact

Discount chain Kmart Corp. Friday was closing in on less than $1.5 billion in much-needed financing from J.P. Morgan Chase & Co. Inc. but was also laying the groundwork for a possible bankruptcy filing, sources said.

Kmart shares were pushed to 30-year lows in the last week after the Troy, Michigan-based company disclosed it was in talks with lenders and reviewing its liquidity position. Wall Street analysts had also raised the prospect of bankruptcy for the nation's second-largest discount chain behind Wal-Mart Stores Inc.

A source close to the lending negotiations said talks are still going on, but nothing has been finalized. The structure and type of financing are still being discussed and the talks are expected to wrap up in the next few business days.

Some had expected Kmart to secure a loan for more than $1.5 billion, but that figure is too high, the source said.

Kmart in the last week also hired Dresdner Kleinwort Wasserstein to help restructure its debt, according to sources.

"We don't comment on rumor and speculation," Jack Ferry, a Kmart spokesman said.

But, according to Loan Pricing Corp., a Reuters subsidiary, there are two options that market players say are left for Kmart -- an asset-backed loan for $2 billion, or bankruptcy.

The retailer is in discussions with lenders for a new asset-backed loan for up $2 billion that would replace its existing credit facility and provide new money. Since existing creditors would not be willing to add new money to the current credit line due to Kmart's debt downgrade, the existing line must be completely refinanced, LPC sources said.

Kmart's other option is to file for bankruptcy reorganization. Already General Electric's financing arm is working on a debtor-in-possession financing facility in case Kmart chooses this route, according to LPC sources.

The stock closed up 18 cents, or 11.54 percent, at $1.74 on the New York Stock Exchange. Turnover was more than 44 million shares, the second highest on the exchange.

Credit rating agencies Moody's Investors Service, Fitch and Standard & Poor's have all cut Kmart's debt to low "junk" status, increasing its borrowing costs.

On Thursday, Kmart named director James Adamson as its chairman, replacing Chief Executive Chuck Conaway. It also said its president, Mark Schwartz, left the company. The changes were viewed as part of the company's efforts to address its financial woes.

The company's silence following a two-day board of directors meeting early this week and a brief statement last week that management was in talks with its lenders and reviewing its liquidity, had spooked the market.

Even if the retailer secures financing, Kmart is expected to have a hard time recovering from recent financial woes.

"What kept us from owning it (Kmart stock), is the simple realization that every morning Kmart had to wake up and face Wal-Mart," Scott Kuensell, managing director at Brandywine Asset Management, said. "That's a daunting challenge. I don't want to own the stock."

Kmart has been dogged by stiff competition from discount rivals Wal-Mart and Target Corp. . Kmart lowered some 38,000 prices on common household products like laundry detergent in a bid to compete with Wal-Mart, but the move failed to generate enough sales and hurt profits.

Problems at Kmart were exacerbated by weak holiday sales.