S&P; Lowers Kmart Bonds to Junk Status

DETROIT —  Kmart Corp. suffered a new blow to its turnaround effort Friday when Standard & Poor’s Corp. lowered the retailer’s bond rating to junk status.

Kmart called the move “excessively severe.”

S&P; said it was taking the action because Kmart has lost significant market share to rivals such as Wal-Mart Stores Inc. and the Target chain of Dayton Hudson Corp.

“Despite very significant efforts by a new management team, it is beyond a two-to-three-year horizon for Kmart to again generate operating and financial performance measures that represent an investment-grade credit,” the rating agency said in a news release.

The announcement came on the same day that another discount retailer, Ames Department Stores, said it will close 17 stores in three East Coast states and cut its headquarters staff, eliminating nearly 1,100 jobs.

The news also came one day after Kmart announced it had reached agreement with all its banks and other lenders to restructure $548 million of real estate debt. Under previous provisions, these lenders could have forced Kmart to repay the debt once its credit rating fell to junk-bond level. Wall Street analysts feared that would have forced Kmart to seek bankruptcy protection.

Kmart said that because of the new bank agreements, it does not expect S&P;’s action to have any immediate effect on the company.

“This action will not interfere with our efforts to effectively pursue a turnaround strategy,” Kmart said in a statement. Shares of the Troy, Mich.-based retailer fell 62.5 cents to $7 on the New York Stock Exchange on Friday.

S&P; cut Kmart’s senior debt rating to BB from BBB and reduced its rating on Kmart’s commercial paper to B from A-2. The move affects about $3.4 billion in debt. The BB rating is a notch below investment grade, making the bonds a speculative investment that is out of bounds for many trusts and investing institutions.

Kmart, with 2,163 stores, has had 11 consecutive quarters of losses or declining earnings. Last year, it closed hundreds of stores and cut thousands of jobs as part of a major reorganization.