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In the early 1990s attorney Gerry Munitz interviewed for the outside counsel job at



, which then as now was in financial disarray. Munitz suggested the company file for bankruptcy.

He didn't get the job.

"They came down hard on Chapter 11," says Munitz, now a lawyer with the Chicago law firm Goldberg Kohn Bell Black Rosenbloom & Moritz. "And I think that's why they didn't hire me."

Perhaps it's time to reconsider. As Kmart stock plunged Wednesday for a sixth straight day, dropping 39% to $1.49, a bankruptcy filing was appearing all but inevitable. The stock, which was the most active on the Big Board with nearly 100 million shares changing hands, has lost more than two-thirds of its value in the New Year.

For the third time in a month, ratings agency Moody's slashed its rating of Kmart's debt; its rivals, Fitch and Standard & Poor's, followed in short order. Rating cuts strain Kmart by making borrowing more expensive for the cash-strapped retailer. Meanwhile, suppliers and trade creditors were dealing the company a potentially crippling blow by withdrawing their support, observers said. To add insult to injury, S&P knocked Kmart out of its widely followed

S&P 500

stock market index.

Feeling the Squeeze

"I think they need Chapter 11," says Munitz, who represented

Federated Department Stores


when it went through bankruptcy in the early 1990s. A bankruptcy filing now would give Kmart time to renegotiate leases at money-losing stores, which would allow the company to aggressively cut costs. Analysts say at least 250 of the company's 2,100 stores need to be shuttered as the first step of any restructuring plan.

Kmart's board of directors met Monday and Tuesday to consider its options, but there's been no word of its decision. Jack Ferry, a Kmart spokesman, says the board's meeting has ended, but would not say if a statement is forthcoming. Kmart, based in Troy, Mich., has previously said it was seeking supplemental financing and that it has at least $300 million of cash on hand.

The Moody's downgrade, which affects some $4.7 billion of debt, puts Kmart's debt further down the ladder of junk status. Its unsecured debt was dropped from B2 to Caa1, its fifth-lowest grade. Moody's said it left the ratings on review for further possible downgrades.

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The repeated cuts have increased the likelihood of bankruptcy, which only a week ago appeared to be a long shot. On Jan. 10, just as other discount chains reported a solid holiday shopping season, Kmart said its same-store sales in December were disappointing. At the same time, it said it would review its liquidity position and business plans for 2002 and 2003.

Burning the Candle

Meanwhile, vendors that do business with Kmart are being turned down for financing from factoring companies, which provide credit to suppliers. One executive of a factoring company in Texas says his office has been inundated with calls from suppliers seeking credit assurances in dealings with Kmart. This person says his firm has stopped supplying credit to suppliers that do business with Kmart, and says insurance companies have stopped extending trade credit insurance to Kmart's purchase accounts.

Trade credit is sometimes used by suppliers to protect themselves should a client fail to pay its bills, and factors often require trade credit insurance before extending financing. This would indicate that many suppliers are demanding payment up front, which would put a further squeeze on cash flow.

"I would think anyone with half a brain would be demanding cash on delivery," Munitz says.

However, some of Kmart's larger vendors have said that business is going on as usual.


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said it was continuing to make deliveries, and that Kmart was current in its payments. And


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, which generates roughly half its nearly $2.4 billion in annual revenue from selling shoes in Kmart, is also being paid on time, says Wendi Kopsick, a spokeswoman for Footstar.

Beyond that, "the company feels it is premature to make a comment," she says. However, she highlighted the company's efforts at expanding the number of retailers that carry its products, such as recently announced deals with Federated and Gordmans, a closely held discount chain. The company's exposure to Kmart has clearly irked investors, as Footstar shares lately were off $1.61, or 6.7%, to $22.39.

Of course, bankruptcy wouldn't necessarily put Kmart out of business. Those in favor of a filing say it would give the company time to renegotiate leases, close stores and get out from under its crushing debt load.

But Munitz points out that Federated, owner of the Macy's and Bloomingdale's chains, entered bankruptcy to reorganize its massive debt and was able to emerge intact because it was profitable at its core. Kmart, however, is far from profitable: The company is expected to report a loss of 9 cents a share for fiscal 2002 when it posts results on March 5.

"There's a difference between a company that needs to reorganize its debt vs. a company that is losing money," Munitz says.

Kmart investors know that all too well at this point.