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February 10, 2003 at 07:00 PM
CHICAGO (HedgeWorld.com)–Kmart Corp filed a reorganization plan that may pave the way for its reemergence from chapter 11 bankruptcy-law protection, contrary to rumors early last week that the kidnapping of hedge fund head Edward S. Lampert would result in a delay in this filing.
The plan, which has been the subject of extensive negotiations with the company’s statutory committees, called for a substantial investment by two hedge fund groups, each of which has bet heavily of Kmart’s bonds since its bankruptcy. The groups are managed by ESL Investments Inc., Greenwich, Conn., and Third Avenue Management LLC, New York.
Those two fund groups will invest at least US$140 million in exchange for equity in the reorganized Kmart. The investment agreement also gives Kmart a call right for up to an additional US$60 million of convertible unsecured financing from ESL, and ESL has agreed that the cash it will receive under the reorganization plan as a pre-petition lender will be used to purchase additional equity.
In anticipation of satisfactory resolution, Kmart, based in Troy, Mich., had already moved up the target date for its emergence to April, from July. Mr. Lampert and another distressed-securities hedge fund manager, Martin Whitman of Third Avenue Management had long pressed Kmart to finalize a plan.
A spokesman for Mr. Whitman recently declined to comment on the whole matter. A spokesman for Mr. Lampert said that he was “not at liberty to speak about the ongoing negotiations over Kmart.”
The U.S. bankruptcy court for the northern district of Illinois, Judge Susan Pierson Sonderby presiding, will hold a hearing on this plan on Feb. 25, and will have to approve the disclosure statement and related voting solicitation procedures before the matter goes further. If the court approves, the company hopes to begin soliciting acceptances in March and to emerge from chapter 11 on or about April 30.
The Kidnapping
Mr. Lampert was abducted on the evening of Jan. 10. On Jan. 13, the day three of the abductors were arraigned in court, Kmart’s board of directors approved the broad outlines of this plan of reorganization as well as a five-year business plan.
Soon after his release, his advisers reportedly delivered the message to Kmart that Mr. Lampert’s corporate alter ego, ESL Investments no longer wanted to be named in any public announcement about the proposed arrangement. The Wall Street Journal, attributing the news to unnamed “people involved in the matter,” said that Mr. Lampert had decided to take a pause after his ordeal before making a major commitment to pay off the creditor banks, which include J.P. Morgan Chase & Co., and Bank of New York Co.
Three of Mr. Lampert’s four abductors were quickly captured. Shemone Gordon and Devon Harriswere both arraigned in federal court in Bridgeport, Conn., Jan. 13 for violating the Hobbs Act, committing extortion that could affect interstate commerce. The third person arrested is a juvenile, and accordingly, authorities have not released his name. The alleged ringleader Renaldo Rose, an ex-Marine, was subsequently arrested in Canada on an immigration charge and now awaits deportation.
Turnover in Kmart’s Management Ranks
According to documents filed with the Securities and Exchange Commission, as of Jan.1, Kmart (Pink Sheets: KMRTQ) has used US$345 million of its debtor-in-possession credit line for letters of credit. Its total DIP availability as of that date was US$1.56 billion.
“We have made considerable progress over the past year in attacking many of the systemic problems that have plagued Kmart’s performance for a long time. Clearly, we continue to face many challenges–both within our organization and in a difficult economic environment that has not been kind to many retailers,” said James B. Adamson, chairman of the board, in a statement.
