Kmart Rallies on Financing Rumor

The retailer is reportedly close to staving off bankruptcy with a new lending arrangement.
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Updated from 4:43 p.m. EST

Kmart

(KM)

shares rose Friday, finally pulling out of a weeklong dive, amid rumors that the company is closing in on a financing deal that would save it from bankruptcy.

CNBC

reported the company is close to securing a $1.5 billion line of credit from a group of banks led by J.P. Morgan Chase. Jack Ferry, a Kmart spokesman, didn't immediately return a call seeking comment.

The talk provoked some rare optimism among Kmart followers. "If they do announce the financing deal, I think that does keep them out of bankruptcy," says Jeff Stinson, an analyst at Midwest Research. (He has a neutral rating on the stock, and his firm doesn't do investment banking.) Kmart rose 18 cents, or 11.5%, to close at $1.74.

Kmart shares have lost more than 60% of their value in the New Year, as investors began worrying that the debt-heavy discount retailer's weak Christmas would put it in a liquidity squeeze. Shares dropped for seven straight sessions starting Jan. 10 as credit agencies slashed Kmart's debt ratings, driving up the cash-strapped company's financing costs and spurring speculation that abankruptcy filing was inevitable.

On Thursday the Troy, Mich., company announced a management shakeup, bringing in James Adamson to replace Charles Conaway as chairman. The company said Conaway would remain as chief executive officer, and that President and Chief Operating Officer Mark Schwartz had resigned.

The move, along with expectations of the financing deal, raised hopes that the company can stave off bankruptcy. Adamsonhas a track record of turning around beleaguered companies such asdrugstore chain Revco and Advantica, a restaurant group that includes the Denny's chain.

But nervousness among vendors remains. While some of the largest companies that supply Kmart, such as

Procter & Gamble

and

Fleming

have voiced their support, saying they are still shipping and getting paid, smaller vendors are being turned down for financing from factoring companies, which provide credit to suppliers, one executive of a Texas factor told

TheStreet.com

. At the same time, insurers have mostly stopped supplying trade credit, which is often used by suppliers to protect themselves should a client fail to pay its bills, for Kmart purchase accounts, this person says.

Still, Adamson's appointment "helped restore some vendor confidence," says Burt Flickinger, managing director of Reach Marketing, which advises several vendors that do business with Kmart.

The company hasn't offered specific guidance for how its going to get itself out of its hole, saying only that it is reviewing its liquidity situation and business plans for 2002 and 2003. The company has also said it is in discussions over supplemental financing and has at least $300 million in cash.

Most analysts say the company needs to shut at least 250 money-losing stores, a move that would cut costs and boost earnings. A bankruptcy filing would allow the company leeway to negotiate with leaseholders, but could also turn away some of its largest vendors, such as

Martha Stewart Omnimedia

(MSO)

, which sells an exclusive line of home products in Kmart. That line has been among the company's rare merchandising triumphs in recent years and Kmart would risk losing it by going into Chapter 11.