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. Last Updated: 07/27/2016

Kmart Corp. Files for Bankruptcy

CHICAGO -- Kmart Corp. on Tuesday filed for bankruptcy protection, the largest retailer ever to do so, after a dismal holiday sales season and stiff competition from rivals Wal-Mart Stores Inc. and Target Corp. left the company strapped for cash.

The second-largest discount retailer, which began business as a "five-and-dime" store in Michigan in 1897, said it had secured $2 billion in debtor-in-possession financing, which allows the company to operate while it is reorganizing.

Kmart said its 2,114 stores continue to operate as the company restructures, but the future of all stores was under review.

"We are determined to complete our reorganization as quickly and smoothly as possible while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," Charles Conaway, Kmart's chief executive officer, said in a statement.

The 105-year-old retailer, which filed for bankruptcy in U.S. Bankruptcy Court in Chicago, said it hopes to emerge from bankruptcy in 2003.

Kmart, the No. 2 discount chain behind Wal-Mart, had been in talks with its lenders to seek additional financing and is expected to report a loss for fiscal 2001.

The company said its decision to seek bankruptcy was based on several factors, including a rapid decline in its liquidity resulting from Kmart's below-plan sales and earnings in the fourth quarter, the evaporation of the surety bond market and an erosion of supplier confidence.

On Monday, Fleming Cos Inc., a major U.S. distributor of grocery products and Kmart's sole grocery supplier, suspended shipments after Kmart failed to make a regular weekly payment.

Scotts Co., a maker of lawn and garden products, also said it stopped shipments to all Kmart stores.

During the restructuring process, vendors, suppliers and other business partners will be paid under normal terms for goods and services provided during the reorganization, Kmart said.

One analyst said the bankruptcy filing would allow Kmart to stock its shelves more easily.

"Undoubtedly, they will continue functioning more normally from now on, and they will get lots of merchandise," said Kurt Barnard, president of Barnard's Retail Consulting Group. "Vendors will no longer be afraid to ship because they are worried they will not get paid."

Moody's Investors Service downgraded the discounter's debt to a lower "junk" status Monday. Rating agencies Fitch, Moody's and Standard & Poor's all rate Kmart's debt a low "junk" status.

Kmart has secured $2 billion in financing from Credit Suisse First Boston, Fleet Retail Finance Inc., General Electric Capital Corp. and JPMorgan Chase Bank.

The financing, which remains subject to bankruptcy court approval, will be used to supplement the Kmart's cash flow during the reorganization process, the company said.

In its filing documents, Kmart and its U.S. subsidiaries listed total assets of $17 billion 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.