Reorganization

Question1: Background of the Kmart

Kmartis a departmental chain store that operates mainly in United Statesthough it has stores in oversea countries such as Canada. It is asubsidiary of the Sears Holding Company, a merger that occurred in2002 after Kmart filed for chapter 11 bankruptcy safeguard.Currently, it is the second largest retail store in the United Statesafter leader’s Wal-Mart. The company sells private label productsand name brands to middle and low income Americans. Kmart has atleast 1200 stores in 49 states in the US which sell differentdomestic appliances. Groceries, outdoor merchandise, toys, sportinggear, lawn, consumer electronic and apparel (Markham,J. W. (2005).

Excessivediversification, intense competition from retail store giants such asWal-Mart and Target and miniature attention to the company’s corebusiness inevitably coerced Kmart into bankruptcy in 2002. Chapter11 allows the company to reorganize to solve financial difficultiesand protects it from liquidation by creditors and other stakeholders. Kmart Company restated its debts and assets and deliberatedwith chief creditors in a bid to come into an amicable arrangement tosolve the problem. Major restructuring was done to lower the chancesof the same situation occurring in future. The closure of more than250 retail stores that were underperforming by the end of the 2002helped Kmart to save more that $250 million. Additionally theconsolidation of department s and the massive retrenchment andlayoffs played a huge role in reducing expenses by $350 million. Thefiling of the chapter 11 bankruptcy protection enabled the company toterminate all the leases that were unsuccessful of the retail storesthat were closed (Markham,2005).

Question2: Predictionof the Well-Being of the Company

Thefinancial position of Kmart improved substantially afterreorganization. Firstly, we exhibit the merging off Kmart with SearsHoldings. Therefore, sales continued to slump even after the filingof bankruptcy protection and the massive reorganization in thecompany, and leading to the consequential closure of more than 200underperforming retail stores after the first three years. On theother hand, the consolidation of department, for example, logisticsand transportation and the sharing of executive team helped save morethan $488 million. Thus, in the next five years after thereorganization, Kmart will be in better financial position inaccordance with this rationale (Markham,J. W. (2005).

Question3: Debts reorganization

Kmartmade effort to restructure and reorganization for variety of reasonsand in various ways. Typically, the reorganization resolvesefficiency concerns to increasing profits in attempt to recover fromthe financial crisis. Debt reorganization includes a contractual oragreed arrangement between parties (company and its creditors)involved in changing terms for servicing debt, more so on moresuitable terms for the debtor. Debt reorganization takes severalforms such as debt forgiveness, debt assumption, debt payments forothers, debt conversions, debt rescheduling and restructuring, anddebts buybacks and prepayments. (Grigorian&amp Raei, 2010)

Mostsignificantly, Kmart adopted debt restructuring which involved anagreement between creditors and debtors to change the terms andconditions for settling the debt on more suitable terms. Thisincluded extension of the repayment periods, decrease in the interestrate, extension of the grace periods for principal repayment, andfixation of the exchange rates at suitable levels for the debt inforeign currency, as well as rescheduling of arrears payment. Thereare two types of debt restructuring namely general debt restructuringand troubled debt restructuring. According to the general debtreconstruction terms, creditors of an organization do not incur anylosses associated with the process of reorganization. Therefore,creditors may decide to lengthen the payment period of loan, or inother cases reduces the interest rate, so as to give more time forthe company to recuperate from a temporary financial crisis, and paydebt after the re-establishment. Debt of restructuring involves aprocess whereby creditors incur losses in the reorganization process.This occurs when the process of reorganization leads to a decrease inthe accrued interest and a consequent dip in collateral value, aswell as reduction in the conversion to company’s equity (Grigorian&amp Raei, 2010).

Rankingof the three types of debt reorganization on order of decreasingeffectiveness

  • Debt restructuring

  • Debt conversion

  • Debt forgiveness

Question4: Financialoverlook of the Kmart

Kmartsenior management lived in the eras of divas and rock stars. Themanagement had a lot of wealth including, company jets, yachts, gatedestates, bonuses and perks. However, the company loan increased the $3.9 billion dollars the company reported in just five years. Althoughthe company was making good sales, it still recorded losses in itstotal output. For example, in the year 2009, its profit margin fellfrom $1.5 billion dollars recorded in the year 2006 to $253 milliondollars. To overcome these circumstances the company needs to followthe following precautions to avoid such losses in future. The companyshould be able to record all its sales properly. Sales record shouldalso be kept safe to ensure that the sales managers are responsiblefor every transaction in the company. Any case of fraud should betaken seriously and acted upon as soon as it is noted. Furthermore,the company should ensure that all that’s all of its debts is paidin time. In addition, the company should be able to investigate thedebtor of his or her capability for pay the debts. In addition, thecompany should employ loss prevention staffs to prevent it fromincurring small losses that could have been prevented before. Thestaff will be responsible of all the daily activities and transactionwithin the company and ensure that they are all aimed at achievingprofit in the long run (LaBrosse,Olivares-Caminal &amp Singh, 2011).

References

Grigorian,D. A., &amp Raei, F. (2010).&nbspGovernmentInvolvement in Corporate Debt Restructuring.Washington: International Monetary Fund.

LaBrosse,J. R., Olivares-Caminal, R., &amp Singh, D. (2011).&nbspManagingrisk in the financial system.Cheltenham, UK: Edward Elgar.

Markham,J. W. (2005).&nbspAfinancial history of modern U.S. corporate scandals: From Enron toreform. Armonk, N.Y.[u.a.: Sharpe.