In a key test of its syndicated lending clout, the new Chase Manhattan Corp. is preparing to drum up commitments from about 50 banks for a $3.7 billion loan for Kmart Corp.
The loan is being watched closely as a gauge of market interest in the struggling retail sector. Kmart lost its investment grade rating in January, and some other retailers - including Caldor Inc. and Edison Brothers - have filed for bankruptcy in recent months.
"This will be an interesting example of the new Chase trying to flex its muscles to see how much capacity there is in the market for a name and a sector that's under a lot of scrutiny," said Kevin Meenan, a principal with Meenan, McDevitt & Co., a Harrison, N.Y., investment banking boutique specializing in the sale and trading of commercial loans.
The loan would consolidate seven existing credit lines totaling $3 billion and provide Kmart with an additional $700 million in liquidity. Chase itself is underwriting $500 million of the credit.
However, bankers considering the deal may be wary of increasing the exposure to the retail sector in light of the financial problems Kmart and other retailers have experienced recently.
"You always run the risk that banks that want out of a credit will use this kind of opportunity," to end the lending relationship, Mr. Meenan said. "It's the 'just vote no' strategy."
Mr. Meenan said that banks that elect not to participate in the new loan get completely repaid for the outstanding loans, providing that the loan gets fully syndicated.
With the loss of Kmart's investment grade rating, the Troy, Mich.-based company's credits have become the responsibility of many of its banks' workout groups.
"For many of these bankers, it's the prisoner's dilemma," said a lender. "Some will want to commit for half of the existing amount, but if too many adopt that approach, there won't be enough banks to get it done, and they'll be stuck where they are."
Rival lenders said the sheer size of the loan makes the deal a challenge, but several expressed confidence Chase could pull it off because of the depth of its relationships with other lenders.
"It's a huge amount, which nobody else in the world could have done," one syndicated lender said.
The new credit would put banks in a stronger position than they were with several of the older loans, because the company is granting liens on its assets for the banks and secondary liens for its vendors. Typically, investment grade companies obtain cash from banks without giving liens to lenders, observers said.
Howard Raab, president of Park Avenue Transglobal Financial Services Inc., Los Angeles, said that the second lien makes manufacturers intensely interested in seeing banks commit to the loan.
That's because many manufacturers depend on Kmart - which generates $34 billion in annual sales - as an outlet for their products. Mr. Raab's company serves as a credit consultant for more than a dozen manufacturers, setting and approving credit lines, and he said his clients will "definitely be watching" the progress of the loan.
"By no means is Kmart out of the woods," Mr. Raab added, "but there is a good feeling of comfort that the banks are renegotiating their loans."
Dan Poole, a retail analyst at First of Michigan Corp., said that the retailer could have been successful without the loan, but that it "makes it a lot easier."
The time for banks "to be nervous was right around Christmas when seasonal borrowings were at their highest," Mr. Poole said. "Now, they've got a good management in place, and they'll have good loans."
Several banks said that they expected the deal to have a successful syndication.
"The deal will be well-received," said a bank loan trader. "It's got fair pricing, the company is starting to come back, and people are starved for assets."
The loan, which is contingent upon a successful planned offering of $750 million in convertible preferred equity, is divided into a $2.5 billion, three-year revolving credit, and a $1.2 billion term loan.
Both parts of the loan are priced at the London interbank offered rate plus 250 basis points. If the term loan is not repaid within the first year, the price on that piece goes up to Libor plus 300 basis points.
