Macy’s Bond Sale Signals Escape From Junk Just a Start: Corporate Finance

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Macy’s Sale Signals Junk Escape Just a Start

Stephen Yang/Bloomberg

Macy’s Inc. issued $800 million of bonds yesterday in its first offering since June 2008.

Macy’s Inc. issued $800 million of bonds yesterday in its first offering since June 2008. Photographer: Stephen Yang/Bloomberg

One day after regaining its third
investment-grade rating, investors are already betting on
further upgrades for Macy’s Inc. (M)

The second-largest U.S. department-store chain issued $800
million of bonds yesterday in its first offering since June
2008. Its $550 million sale of 10-year notes, rated Baa3 by
Moody’s Investors Service after a Jan. 9 upgrade and BBB- by
Standard Poor’s and Fitch Ratings, yielded 200 basis points
more than similar-maturity Treasuries, within the average 226
basis-point spread on A rated corporate bonds.

Macy’s, based in Cincinnati, hadn’t sold debt since April
2009, when it was downgraded to junk by Moody’s and SP. It paid
a tighter spread on the 10-year debt than the higher-rated
retailer Nordstrom Inc. (JWN) had on a similar issue in October.
Macy’s cut its ratio of debt to earnings before interest, taxes,
depreciation and amortization to 2.8 at the end of October from
3.5 times in February 2008, according to Moody’s.

“They’ve been working toward getting back to investment-
grade since the recession started,” said Maggie Taylor, a New
York-based senior credit officer for Moody’s, who has tracked
Macy’s since 2009. “They’ve been paying debt and focusing on
their store operations with the goal of getting back to
investment grade.”

‘Historic Downturn’

Chief Financial Officer Karen Hoguet has emphasized to
analysts and investors that investment-grade ratings are
important to the chain for retaining access to capital markets.
“We believe that a retailer like ourselves should be investment
grade,” Hoguet said in a telephone interview yesterday. “It
gives us financial flexibility. We just lived through an
historic downturn.”

“It is nice to have a strong balance sheet during times
that are not so great,” she said.

The 10-year notes were initially marketed at a spread of
about 212.5 basis points, and the narrower result indicated
heightened demand for the securities, said a person with
knowledge of the offering, who declined to be identified citing
lack of authorization to speak publicly.

The debt, sold at 99.19 cents on the dollar, rose to about
100 cents to yield 3.88 percent, or a spread of 195 basis
points, at 10:21 a.m. in New York, according to Trace, the bond-
price reporting system of the Financial Industry Regulatory
Authority.

Macy’s won its investment grade by reducing its debt,
tackling its underfunded pension plan and improving its
operating performance through the introduction of its almost
four-year-old “My Macy’s” program that uses 1,600 district
managers to better align merchandise to local tastes.

Debt Payment

The company, which operated about 850 namesake and
Bloomingdale’s stores as of Jan. 29, issued the debt through its
Macy’s Retail Holdings Inc. unit. It may use proceeds from the
offering to pay back $616.9 million of 5.35 percent senior notes
due in March and $172.8 million of 8 percent senior debt
maturing in July, according to a filing yesterday.

Bank of America Corp., Credit Suisse Group AG and JPMorgan
Chase Co. managed the sale for the company, which had $6.15
billion of long-term debt as of Oct. 29, according to its most
recent quarterly filing. That’s down from about $6.98 billion a
year earlier.

The sale wasn’t specifically triggered by the rating
upgrade this week, Hoguet said.

The offering was split between the 3.875 percent, 10-year
notes and $250 million of 5.125 percent, 30-year bonds which
were issued at a 212.5 basis-point spread, according to data
compiled by Bloomberg. The coupon on the 10-year note was the
lowest on record for Macy’s in data going back to 1991, and the
rate on the 30-year bond was the least for that maturity, the
data show.

Nordstrom Sale

Nordstrom, ranked Baa1 by Moody’s and A- by SP, sold $500
million of 4 percent, 10-year notes on Oct. 5 at a 212 basis-
point spread, the data show. Seattle-based Nordstrom has been
investment-grade since at least 1980.

The average BBB graded bond pays a spread of 306 basis
points, according to Bank of America Merrill Lynch index data.

Investors are anticipating a potential improvement the
company’s credit ranking, said Jody Lurie, a corporate credit
strategist at Janney Montgomery Scott LLC in Philadelphia.

“As long as the economy doesn’t get worse, Macy’s can at
least stay at the level they’re at, or can get better,” Lurie
said. “People have seen the last couple years as indicative of
what’s to come, whether or not that’s true, in terms of upgrades
and shareholder rewards and in terms of management strategy.”

‘Clear Signal’

When Macy’s, which trails Sears Holdings Corp. by revenue,
lost its investment-grade credit grades at SP and Moody’s in
2009, the rating companies cited the effect of the U.S.
recession on consumer spending and consumer confidence, sales
and leverage ratios. SP raised Macy’s back to investment-grade
in May, Bloomberg data show.

The company met the level of interest coverage in the third
quarter that Moody’s required for an upgrade, Taylor said. The
ratings company waited to lift the company out of high-yield,
unsure whether a rise in commodity costs and a weak economy
would change that figure, she said.

Last week’s better-than-estimated sales results and upward
revision in earnings estimates were “a clear signal” that it
did better in the fourth quarter than Moody’s expected, meeting
investment-grade metrics, Taylor said.

Macy’s reported a 6.2 percent increase in December same-
store sales last week, topping the 4.6 percent estimate of
analysts surveyed by researcher Retail Metrics Inc. The company
also increased its fourth-quarter earnings forecast to as much
as $1.60 a share, after earlier projecting a maximum $1.57.

Dividend Doubled

The company doubled its quarterly dividend and raised its
share repurchase program to as much as $1 billion, Chief
Executive Officer Terry Lundgren said in a Jan. 5 statement.

While Macy’s plans to return excess cash to shareholders,
it’s committed to “maintaining a strong balance sheet and
maintaining credit ratios that are consistent with an
investment-grade rating on our debt,” Lundgren said.

“Our approach to the capital structure is to be balanced,”
Hoguet said. “As long as we are able to achieve the target
credit metrics we have set, we are striking the appropriate
balance between bondholders and shareholders.”

To contact the reporters on this story:
Sapna Maheshwari in New York at
sapnam@bloomberg.net;
Cotten Timberlake in Washington at
ctimberlake@bloomberg.net

To contact the editors responsible for this story:
Alan Goldstein at
agoldstein5@bloomberg.net;
Robin Ajello at
rajello@bloomberg.net

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