Looks like the flashing blue light may soon be seen in a bankruptcy courtroom:
biz.yahoo.com
Friday January 11, 4:16 pm Eastern Time
Kmart bond prices say trouble;analysts say not yet
By Jonathan Stempel
NEW YORK, Jan 11 (Reuters) - Investors are beating down Kmart Corp.'s (NYSE:KM - news) bond prices as though the company is headed for bankruptcy court -- but it may be too early to dismiss the No. 2 U.S. retailer, analysts said.
``I believe the bond prices have embedded in them an expectation of a possible bankruptcy in the short-term,'' said Robert Goch, a senior vice president at Miller Tabak Roberts Securities LLC in New York. ``Obtaining a secured (credit) facility would stabilize those prices.''
Analysts said Kmart should, in fact, be able to obtain such a credit line, meaning a potential recovery for the bond prices.
``What's apt to occur in the short-term is Kmart will obtain a bank line secured by its inventory, which is not uncommon,'' said Charles Ronson, a securities analyst for Redwood Brokerage Services in Jersey City, New Jersey. ``An asset-backed loan could tie it over for at least a couple of quarters.''
The Troy, Michigan-based retailer's bonds have gyrated, and headed mostly lower, this week. Concerns that Kmart may be headed for the courthouse were prompted by a ``sell'' recommendation from a Prudential Securities analyst. Kmart has been facing fierce competition from such rivals as Wal-Mart Stores Inc. (NYSE:WMT - news), Target Corp. (NYSE:TGT - news) and Kohl's Corp. (NYSE:KSS - news).
Kmart's 9.375 percent notes maturing in 2006 and 9.875 percent notes maturing in 2008 were offered Friday at 68 and 67 cents on the dollar, traders said. That was down from about 80 cents on Monday. Those prices correspond to yields of 21.6 and 19 percent, levels considered ``distressed.''
Kmart's shares fell this week to a 33-year low.
``The (bond) levels tell me there are more sellers, and people don't want to hold these bonds even through the weekend,'' said Scott McCullough, a senior corporate bond analyst at Raymond James & Associates Inc. in St. Petersburg, Florida, who rates the bonds a ``sell.''
MATURING CREDIT LINES
Kmart has $1.5 billion of credit lines maturing in December and its ``junk'' credit ratings make it unlikely the company will be able to obtain unsecured bank debt.
On Thursday it said it is talking with lenders ``regarding its existing and possible supplemental financing facilities.''
Banking sources this week told Loan Pricing Corp., a unit of Reuters, that Kmart is in early talks with J.P. Morgan Chase & Co. (NYSE:JPM - news) and others to obtain a loan secured by assets, which analysts said would likely include inventory.
Kmart carries ``junk'' ratings from Moody's Investors Service, Standard & Poor's and Fitch. Upscale rival Saks Inc. (NYSE:SKS - news), also rated ``junk,'' obtained $700 million of such financing in November.
Rating agency Fitch, which downgraded Kmart this week, said it expects a refinancing to be successful, ``albeit with higher rates, more restrictive covenants, and possibly security.''
Such financing, though, doesn't address the retailer's longer-term problems, including weak sales and outmoded stores -- problems that analysts said on Friday could result in the closure of many of Kmart's 2,100 stores.
``Kmart has to conserve cash, make sure it continues to pay its vendors and I think host a conference call to crush any speculation of a Chapter 11'' filing, McCullough said.
``There's a high likelihood of an announcement before the fiscal year end of cost-cutting measures, including possible additional short-term financing, store closures or head count reductions,'' he added. ``Any of these could amount to a moderate positive that could reverse'' this week's bond losses, he said.
But Kmart still has to face with the competition, analysts cautioned.
``Kmart has fundamentals to address -- Wal-Mart at one end, and Target and Kohl's at the other,'' said Ronson. ``Wal-Mart has an almost infinite bankroll and Kohl's and Target have adept and alert managements. It's not a question of interest being greater than cash flow. It means a lot of Kmart's capital expenditures are really not discretionary.'' |
