Macy’s Bond Sale Well Received

Investor demand signals retailer’s escape from junk status just a start.

One day after Macy’s Inc. regained its third investment-grade rating, investors are already betting on further upgrades for the retailer.

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 S&P. It paid a tighter spread on the 10-year debt than the higher-rated retailer Nordstrom Inc. 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.”

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, ranked Baa1 by Moody’s and A- by S&P, 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 S&P 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. S&P 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.

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.”



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