Kmart Corp. may soon be out of the discount bin.

The nation's third-largest retailer, with more than $2.5 billion in bank debt, appears to be on the rebound after years of disappointing performance.

"They've made significant headway in reducing costs," said Wayne Hood, an analyst with Prudential Securities in Atlanta. Mr. Hood is one of three analysts who recently recommended buying Kmart stock. "They've become very competitive with the Targets and Wal-Marts."

The discount retail chain's latest good news came last week, when Moody's Investors Service said it would review Kmart's corporate and debt ratings for a possible upgrade.

The move reflects "the company's ongoing progress in improving performance," Moody's said in a research report announcing the review.

Kmart, based in Troy, Mich., announced March 3 that net income increased 61% in the fourth quarter from a year earlier, to $353 million. The earnings solidly beat Wall Street expectations.

A turnaround for the firm comes as mixed news for the dozens of banks that stepped up to finance the firm in 1996 with a $3.7 billion financing package led by Chase Manhattan Corp. At the time, the deal was one of the largest leveraged packages ever, and the biggest by Chase after its merger with Chemical Bank.

The bank group included Bank of New York, J.P. Morgan & Co., Lehman Brothers, CIBC Wood Gundy Securities, and BankAmerica Corp. Last year, Kmart paid off a $1.2 billion term loan piece of the financing.

The good news, Mr. Hood said, is that Kmart is a much stronger company paying a healthy premium for its credit line- the London interbank offered rate plus 250 basis points.

The bad news, he said, is that Kmart is doing too well. Mr. Hood is forecasting that it will pay off the credit line by yearend. On its own, the line would expire in June 2000.

"They don't need a credit line of that size anymore."

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