Kmart, the struggling discount retailer, is looking to refinance about $1.5 billion in credit facilities and slap on an additional $400-500 million, but bankers say the company will have to pay up to get it done. As first reported last week on LMW's Web site, Kmart is looking at a $1.5 billion revolver and a $500 million institutional tranche, said a banker. "Some relationship lenders will probably bail," he added, so the institutional tranche would be built in to widen the universe of potential investors. The spread is currently LIBOR plus 1%, but the once BB+ company which is now BB is more likely to have pricing in the LIBOR plus 21/ 2% range, sources said. Bankers have suggested the company will have to go down the asset-based route in order to leverage the mass of inventory and assets rather than rely on an uncertain cash flow.
It is likely Kmart will pledge inventory, said another, but the problem is a bond indenture may allow the firm to pledge only $1.5 billion rather than pledging $2 billion to cover the whole deal. Kmart has racked up debt last year and a Prudential Securities analyst said he wouldn't rule out the possibility of the Troy, Mich.-based discount chain filing for bankruptcy.
Philip Zahn, a retail analyst at Fitch, said he thinks a refinancing deal will be successful, but noted, "I'm sure they will pay more." With a lower credit rating the company really does not have a choice. Along with higher rates, there will likely be more restrictive covenants and increased security, he added. John McDonald, cfo, referred questions to a spokesman, who did not return repeated calls. J.P. Morgan spokesman Adam Castellani declined all comment, noting Kmart is a client.
The existing credit matures in December 2002, said Zahn, and so will have to be refinanced soon. Zahn said the discount retail sector usually bears well in a recession, but Kmart is facing intense competition from Wal-Mart and Target. The company has been in the midst of a turnaround effort with new management, but sales reversed in 2001 and cash flow is weak. There are efforts to improve systems and distribution, but until the economy improves, near-term results are not going to strengthen, he added.