Kmart Loans Draw Blue Spotlight Special

Observers were scratching their heads once again Wednesday as they examined the latest twists in the

Kmart

(KM)

story.

Most perplexing to many analysts and investors is how the bankrupt discount retailer chose to dole out about $30 million in loans to top executives in the months before it filed for Chapter 11 in January. But also drawing blank stares is the continued appreciation of the company's stock, which has more than doubled since Kmart sought creditor protection -- despite the fact that shareholders typically retain no value in bankruptcy reorganizations.

"In the end, I'm not sure what equity holders will get from Kmart," says Jeff Stinson, an analyst at Midwest Research who is one of the few Wall Streeters to cover Kmart. Stinson, who expresses surprise that the stock remains capitalized at $763 million even as the company closes stores and otherwise prepares for a sweeping makeover, is neutral on the stock, and his firm doesn't have an investment banking business.

RIF

Certainly one thing equity holders have been getting plenty of from Kmart is reading material. The loans were disclosed in an easy-to-digest 10,000-page filing Monday at the U.S. Bankruptcy Court in Chicago and first reported Wednesday by

The Wall Street Journal

.

While offering loans and other incentives to executives to keep them from fleeing when a company goes through bankruptcy isn't in itself uncommon, say compensation experts, many of the officers given loans have since left. In total, the company gave $18 million in loans to nine executives who have left, the

Journal

reported.

This includes former CEO Chuck Conaway and Mark Schwartz, Kmart's former president. Conaway received a $5 million loan, which has since been forgiven, while Schwartz got a $3 million loan. It is not yet clear if the loans given to the executives that have departed -- minus the one to Conaway -- will be forgiven, says Jack Ferry, a spokesman at Kmart.

While the company spun the departures as resignations, it is widely believed that Conaway and Schwartz were pushed out to make way for a new team under James Adamson, who was appointed chairman in January and later named CEO.

"This was something as part of an executive retention initiative approved by the board last October," says Ferry, who explains that at that time no one could have foreseen the company's quick downfall.

That said, some experts wondered just what the company was thinking, doling out loans like this as its financial health was quickly deteriorating.

'Bad'

"What makes this situation look bad, is why would you want to give all that money to someone you want terminated?" says Mae Lon Ding, an employee compensation expert and president of consultancy Personnel Systems Associates, who has no connection to the Kmart case. "If this person is responsible for leading you into bankruptcy, you'd have to wonder why you'd want him to stick."

Meanwhile, one representative of Kmart shareholders criticized the loans. This person, speaking on condition of anonymity, questioned why executives were lining their pockets as investors face the prospect of being left out in the cold.

The debt-heavy discount retailer filed for Chapter 11 bankruptcy protection in January after a weak holiday season raised its cash-flow problems to crisis levels. That triggered debt downgrades from the major credit rating agencies, making it more expensive to borrow money.

In March, the Troy, Mich.-based company announced that it was closing 284 underperforming stores and slashing 22,000 jobs in an effort to improve its financial performance. The number of store closings fell below what many had expected -- some observers had put the number at between 500 and 750 -- and many analysts expect another round.

Meanwhile, the stock has stayed well above $1, the threshold for being delisted from the

New York Stock Exchange

. A number of experts have told

TheStreet.com

that investing in bankrupt companies is fraught with danger, as shareholders typically walk away with nothing. In most bankruptcies, the current equity is canceled, and new equity given to creditors and court-approved major shareholders. Even if shareholders get anything, it is likely to amount to cents on the dollar, these experts say.

In trading Wednesday, the stock rose 5 cents, to $1.52.