Kmart's bank debt strengthens on reorganization plan filing

By Sara Rosenberg

New York, Jan. 27 - Kmart Corp. bank debt responded favorably Monday in response to the extra clarity and specific details about its reorganization, jumping up by about a point and a half to two points.

The loan is now being quoted in the 36 to 37 area, a distressed trader told Prospect News.

He cited the announcement late Friday that the company filed its plan of reorganization as the impetus for the rally.

The plan of reorganization calls for a substantial investment by ESL Investments Inc. and Third Avenue Value Fund of at $140 million in exchange for shares of stock in the reorganized Kmart. Kmart also has a call right for up to an additional $60 million of convertible unsecured note financing from ESL Investments. Furthermore, ESL has agreed that the cash that it would receive under the plan of reorganization as a holder of approximately $380 million of pre-petition bank debt will be used to purchase additional equity.

Other details of the plan include: pre-petition lenders, who are owed approximately $1.08 billion, will receive cash equal to 40% of the principal amount of their claims in lieu of shares of new common stock of the reorganized Kmart; holders of $2.3 billion face amount of Kmart's pre-petition notes and debentures along with trade creditors, service providers and landlords with lease rejection claims will share pro rata in the stock of reorganized Kmart, other than the shares allocated to the plan investors; and, a Creditors' Trust will be established for the benefit of creditors and, subject to the receipt of requisite votes, holders of trust preferred securities and/or common stock, to pursue all causes of action arising out of the stewardship investigation.

"With the filing of our Disclosure Statement and Plan of Reorganization, Kmart is moving ever closer to concluding our reorganization and emerging from Chapter 11 in a stronger and more financially stable position," said Julian Day, president and chief executive officer, in a news release. "The Chapter 11 reorganization process is allowing us to achieve many important goals, including the elimination of hundreds of underperforming stores, the rejection of costly leases, and the restructuring of our balance sheet through the conversion of substantially all debt into equity. We are intensely focused on emerging from our reorganization cases this April because we firmly believe that the further operational improvement we need to implement will be best achieved outside of Chapter 11."

As previously reported, Kmart has received a commitment for $2 billion in exit financing from GE Commercial Finance, Fleet Retail Finance Inc. and Bank of America. The exit financing facility would replace the company's current $2 billion DIP facility on the effective date of the reorganization plan.

Security for the loan will be the Troy, Mich. discount retailer's inventory.

Proceeds will be used to help fund the company's working capital needs, including borrowings for seasonal increases in inventory.

The bankruptcy court will hear motions on payments to the exit lenders in connection with its $2 billion exit facility on Jan. 28.

In primary news, original speculation that TRW Automotive's $1.81 billion credit facility (Ba2/BB) would launch in January proved true on Monday as a bank meeting was held for the new facility.

"I think they're hustling it along a bit," a source close to the deal said. "They're moving forward. The market is strong."

Timing on the retail launch has been in question recently since the syndicate was still in Europe last week doing a roadshow for the bonds. But, the deal was anticipated to occur in either late January or early February.

The loan consists of a $500 million six-year revolver with an interest rate of Libor plus 350 basis points, a $410 million six-year term loan A with an interest rate of Libor plus 350 basis points and a $900 million eight-year term loan B with an interest rate of Libor plus 400 basis points, according to a syndicate source. The various tranches will be comprised of U.S. dollars and euros, however the split has not yet been determined.

JPMorgan, Credit Suisse First Boston, Lehman Brothers, Deutsche Bank and Bank of America are the lead banks on the deal.

Proceeds from the loan will be used to help fund the acquisition of TRW by The Blackstone Group from Northrop Grumman Corp.

TRW is a Livonia, Mich. diversified supplier of automotive systems, modules and components.

Meanwhile, deals like Dole Food Co. Inc., Constellation Brands Inc., Ameripath Inc. and Moore Corp. Ltd. are all on the horizon but official launch dates have not yet been set. One market professional speculated that timing is not being pinned down since all the deals are "waiting on ratings."

"How do you know where to price the spread if it's not rated?" the professional added.

Dole Food is expected to come to market with a $1.15 billion credit facility via Deutsche Bank, Scotia Capital and Bank of America, which is expected to consist of $850 million of term loans and a $300 million revolver.

Proceeds will be used to help fund the buyout of Dole by DHM Acquisition Co., which is wholly owned by David H. Murdock.

Dole is a Westlake Village, Calif. producer and marketer of fresh fruit, vegetables and flowers.

Constellation Brands is expected to launch a $1.6 billion credit facility consisting of an $800 million six-year term loan B a $400 million five-year term loan A and a $400 million five-year revolver. There is also a commitment for a $400 million bridge loan if necessary.

JPMorgan, Salomon Smith Barney and UBS Warburg will lead this deal that will be used to help fund the acquisition of BRL Hardy Ltd.

Constellation is a Fairport, N.Y. producer and marketer of alcoholic beverages.

Ameripath is looking to launch a $375 million credit facility consisting of a $300 million term loan B and a $75 million revolver.

Credit Suisse First Boston and Deutsche Bank are the lead banks on the facility that will be used to help fund the leveraged buyout by Welsh, Carson, Anderson & Stowe.

Ameripath is a Riviera Beach, Fla. provider of cancer diagnostics, genomic, and related information services.

And last, Moore is expected to launch an $850 million credit facility via Deutsche Bank, Salomon Smith Barney and Morgan Stanley, which will consist of a $500 million term loan B and $350 million pro rata.

Proceeds will be used by the Mississauga, Ont. manager and distributor of print information to help fund the acquisition of Wallace Computer Services Inc.

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