Kmart Corp. and 37 of its U.S. subsidiaries has become the largest retailer to seek bankruptcy protection. The $40-billion company filed voluntary petitions in the U.S. Bankruptcy Court for the Northern District of Illinois, in Chicago for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

In its announcement Jan. 22, Kmart said its decision was based on a combination of factors, including a rapid decline in its liquidity resulting from its sales and earnings performance in the fourth quarter, the evaporation of the surety bond market and an erosion of supplier confidence.

The erosion of supplier confidence was seen Jan. 21 when the Fleming Companies suspended shipments to the chain store after Kmart failed to make its weekly payment for delivery of food and other consumable products. To recover most of its approximately $78 million in merchandise receivables, Fleming stopped shipments to all Kmart stores, except for certain perishable food products already in-transit, and submitted a notice of reclamation to Kmart along with a notice of failure to pay. Fleming's business arrangement with Kmart included a seven-day invoice and payment cycle for product shipments. However, on Jan. 22, Fleming responded to the Kmart bankruptcy announcement by saying it intends to resume delivery of food and other consumable products to Kmart as it soon it receives satisfactory assurances from Kmart, via the bankruptcy court.

In its bankruptcy filings, Kmart indicated it will reorganize on a fast-track basis and has targeted emergence from chapter 11 in 2003. The store chain says it will fund its turnaround and continuing operations with a $2 billion senior secured debtor-in-possession (DIP) financing facility from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and JPMorgan Chase Bank.

Ronald B. Hutchison has been named executive vice president and chief restructuring officer. He was most recently chief financial officer of Advantica Restaurant Group Inc. where he was a key player in the company's reorganization. He also was involved in the financial reorganization of Leaseway Transportation in the early 1990s.

According to a Kmart, vendors, suppliers and other business partners will be paid under normal terms for goods and services provided during the reorganization. In its filing documents, Kmart and its U.S. subsidiaries listed total assets of $17 billion of assets at book value and total liabilities of $11.3 billion as of the fiscal quarter ended Oct. 31, 2001. Kmart's foreign subsidiaries are not covered by the filing and are operating as normal.
--Rene Tankersley