Coming Kmart/Sears entity gets junked

By Staff -- Home Textiles Today, 2/10/2005 12:05:00 PM

NEW YORK -- The impending marriage of Kmart and Sears has met with some skepticism from the Big Three corporate credit rating agencies, each of which has assigned junk-bond status to the combined company once the deal goes through, possibly by next month.

Fitch Ratings assigned a BBB-rating to $4 billion in debt at Sears Holding Corp., the surviving company, and slapped a "negative” rating outlook on the company.Fitch cited "weak operating trends, long-term competitive challenges facing Sears and Kmart, and risks in executing an accelerated off-mall store growth strategy by Sears."Moody's Investors Service gave the new company its highest junk rating, Ba1, and said it's leaving the rating on review for a possible downgrade.The agency said the rating "considers the risks associated with integrating and repositioning two challenged retailers in a fiercely competitive environment, as well as the solid credit metrics that will result from this debt-free combination, and the additional financial flexibility provided by its real estate holdings and the $4 billion senior secured credit facility."Standard & Poor's also gave the new Sears its highest junk-bond rating, BB+, saying the rating reflects "an increase in business risk for the combined company, as both Sears and Kmart will continue to be challenged to improve store productivity and profitability. Each business has struggled with intense competition over a number of years from companies like J.C. Penney Co. Inc., Kohl's Corp., Wal-Mart Stores Inc. and Target Corp."