Kmart Moves to Head Off Chapter 11 : Retailing: Company eliminates stock dividend and reaches agreements with bondholders.

In a move to give it more time and resources to revive its operations, Kmart Corp. said Wednesday that it eliminated its stock dividend and reached agreements with bondholders to defuse a potential crisis that analysts said could have forced a bankruptcy filing.

The agreement in principle with banks and insurance companies eliminates covenants that would have forced Kmart to immediately pay $548 million should its bonds be downgraded to below investment-grade status.

The bond deal should end speculation that Kmart might file for Chapter 11 bankruptcy protection in the near future. In all, a downgrading could have forced Kmart to pay $681 million in bond debt to banks and insurance companies. Many investors had feared that Kmart would be unable to pay its bond debt. Talks are continuing on the remaining $133 million of bond debt.

One credit-rating agency, Standard & Poor’s Corp., said earlier this week that it will not decide whether to downgrade Kmart’s debt until it reviews the retailer’s holiday season sales in January. Kmart’s bonds are also under review by Moody’s Investors Service.

“Now, regardless of what Moody’s or Standard & Poor’s does, Kmart has gained time,” said Kurt Barnard, president of the New Jersey-based Barnard’s Retail Marketing Report. “The fact that the insurance companies and banks are backing Kmart is a signal to Kmart’s suppliers that Kmart is not about to go bankrupt. It means that [the company] has time to demonstrate to Wall Street that Kmart can be turned around.”

Kmart, the nation’s No. 2 retailer, also said it reached an agreement to extend the terms of some of its revolving credit lines. Kmart said the debt agreements generated one-time fees and financing costs that will result in a pretax fourth-quarter charge of $70 million to $100 million.

“These agreements will resolve the . . . debt issues and allow us to build a financial structure that will provide greater stability and financial flexibility to the benefit of our suppliers and other key stakeholders,” said Marvin Rich, executive vice president at Kmart.

Kmart, which has been waging a sales war with discount rivals Wal-Mart and Target, has reported 11 consecutive quarters of either declining earnings or losses. The company reported a $69-million loss for the third quarter of 1995, contrasted with a profit of $39 million for that period a year ago.

Kmart shares were unchanged at $6, a 13-year low, in trading Wednesday on the New York Stock Exchange.

Analysts expect Kmart to save more than $200 million a year by discontinuing the common stock dividend.

Responding in more detail to recent assertions, Kmart also said Wednesday that it is not behind in payments to three suppliers represented by a Los Angeles-based credit-consulting firm.

On Monday, Howard Raab, president of Park Avenue Transglobal Financial Services, said Kmart was delinquent in payments to three of his clients. Raab said his consulting firm had advised the clients not to make further shipments to Kmart unless the retailer makes cash payments or provides a letter of credit.

Kmart said earlier that it has been paying its suppliers on time and it reiterated that statement Monday in response to Raab’s comments. The company on Wednesday said it called Raab about his clients and determined that it is not delinquent.

Raab declined to comment Wednesday.