Kmart, Conseco bank debt drop on investor worries

By Sara Rosenberg

New York, Aug. 15 - Distressed names such as Kmart Corp. and Conseco Inc. are grabbing secondary market attention in an otherwise quiet August market. Bank debt of these two companies have dropped a number of points since last week as concerns and questions plague investors' minds.

Kmart was quoted around 40 versus a quote around 55 last week, a trader said.

"The Ames news and the amendment on the DIP freaks everyone out in this kind of market," the trader explained.

Ames Department Stores Inc., a Kmart competitor that also filed for voluntary reorganization under Chapter 11, is liquidating and closing all of its stores. "This was a wrenching decision, but the right course to take. Continued softness in sales, combined with tightening terms and slower shipments from our suppliers, have reduced our funds availability below critical levels," said Joseph R. Ettore, chairman and chief executive officer, in a press release Wednesday. "To ensure the greatest possible value for our various stakeholders - including our associates - Ames management has resolved to pursue an orderly liquidation of the company now, rather than continue along a path that would further diminish our resources and lead Ames to default on its lending agreements."

Ames is a Rocky Hill, Conn. regional discount retailer.

Also on Wednesday, Kmart filed a motion with the U.S. Bankruptcy Court to amend its $2 billion debtor-in-possession financing facility to adjust the EBITDA covenant, increasing flexibility and better reflecting sales performance since filing for bankruptcy. Furthermore, the company is trying to obtain lender permission to increase the size of the facility by up to $500 million.

The proposed increase to the DIP facility is attributed to the company's desire to provide additional comfort to suppliers and the factor community so as to optimally position itself during the holiday season, according to a news release.

The amendment of the EBITDA covenant is expected to be approved before the end of August and the Troy, Mich. merchandising company "is optimistic" that the DIP's proposed increase in size will be lender approved, according to the release.

Conseco traded around 50 on Thursday, according to a trader, compared to around 55 during the previous week's activity.

The real trouble began on Aug. 9 when the company announced a radical restructuring, including exercising a 30-day grace period on upcoming bond interest payments. In addition, the company decided to engage financial advisor Lazard Freres & Co. and legal advisor Kirkland & Ellis to begin discussions with debt holders on the restructuring of capital.

Following this announcement, Moody's Investors Service confirmed the company's ratings, except for preferred stock, which was lowered to C from Ca, and assigned a developing outlook to the company's ratings. The preferred stock rating was lowered to reflect the expectation that stockholders will have little, if any, recovery value in a capital restructuring.

Meanwhile, Standard & Poor's cut Conseco's ratings, including its senior notes to CC from CCC+ except for its $250 million 6.4% notes due 2003, $800 million 8.75% notes due 2004, $14.936 million 6.4% notes due 2004 guaranteed by CIHC, Inc. and $366.294 million 8.75% notes due 2006 guaranteed by CIHC which were lowered to D from CCC+.

Fitch Ratings opted to downgrade the company's ratings as well, lowering its senior notes to C from CCC, its preferred stock to C from CC and its trust preferreds to C from CC. The C rating indicates imminent default, Fitch noted.

The story continued on Monday when the New York Stock Exchange suspended trading in Conseco's stock.

And then, on Wednesday, the Indianapolis, Ind. insurance and loan company announced second quarter earnings of $1.3 million versus $69.6 million for the same period last year. Shareholder's equity was reduced to $533 million at June 30 from more than $4.7 billion at Dec. 31, 2001, with the combined effect of operating results and non-operating charges.

Furthermore, in the earnings release, the company stated that it "has begun speaking with its creditors to attempt to achieve a consensual restructuring. If it is unable to achieve restructuring out of court, the company may use Chapter 11 to achieve that goal."

Lastly, Conseco said those two words that investors have recently grown to loathe - possible "accounting irregularities" - when the company revealed in its 10-Q filing that the Securities and Exchange Commission and the Department of Justice are currently investigating the company's accounting methods.

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