MOODY'S TO REVIEW KMART CREDIT

EVAN CLARK / Additional reporting by David Ghitelman

NEW YORK -- Moody's Investors Service here said last week it had placed the debt of Kmart Corp., Troy, Mich., on review for possible downgrade in light of ongoing restructuring initiatives and pressure from a chilly business environment.

Currently, the discounter's senior unsecured debt rests at Baa3, the lowest tier of investment grade. Moody's analyst Philip Emma said, "They're performing operations better than they were, but the finances haven't yet caught up to that."

Since August 2000, Kmart has been engaged in what Emma described as "a very complicated and thorough turnaround effort." Progress has been made in the areas of in-stock positions at stores, customer satisfaction and supply chain management, he said.

"However, these operational improvements have not yet delivered the kind of overwhelming evidence, namely significant improvement in profit levels [that would indicate an imminent decrease in Kmart's debt]," Emma said.

The review, which should be completed within 60 days, will focus on the financial impact of the restructuring initiatives and the sustainability of improvements that have already been made.

"It's not just can you fix those problems," Emma said, "but could you fix them permanently?"

Industry analysts explained to SN that a lower credit rating would make it more expensive for Kmart to borrow money for capital projects.

Gary Giblen, director of research and senior vice president, C L King Associates, said the rating review could also be a sign of worse times to come for Kmart.

"There have to be some substantial affirmative concerns for Moody's to undertake this because this is not Kmart's normal review time," he said.