According to a press release from Standard & Poor's last week, the rating agency lowered its ratings on 14 Kmart Corporation-related credit tenant lease transactions and placed them on CreditWatch with negative implications. This action was in conjunction with S&P's lowering of Kmart Corp.'s issuer credit rating to single-B-minus from double-B-plus on January 14.
Concurrently, Moody's Investors Service downgraded Kmart Corp.'s senior unsecured debt rating to Caa1' - the second downgrade in less than a week and the seventh notch downward from an investment-grade Baa3' rating held by the company as recently as Dec. 14.
Kmart is one of the original CTL credits with numerous transactions of early 1990s vintage. Source's estimates vary, but an estimated $2 billion of Kmart CTL paper is said to be in the market - a large portion of which is not rated by any of the nationally recognized statistical rating organizations.
The credit tenant lease transactions downgraded by S&P are all from 1993-95. Payment on the securities backed by those leases is dependent on either the flow of lease payments by a Kmart-related entity or a Kmart guarantee. According to S&P, while the transactions benefit from first mortgage liens on the underlying properties, the value of the liens and properties do not warrant a rating above that of Kmart's senior secured and unsecured debt.
Nonetheless, several sources have confirmed that "smart players" are trading Kmart CTLs in the secondary market for 40 to 60 cents on the dollar based on the perceived value of the underlying real estate and the assumption of zero credit value.
At press time, long-tenor Kmart corporate paper was trading at 42 to 52 cents on the dollar - representing a 40-point drop in less than two weeks.