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Macy's Prices $400M of 10-Year Senior Notes

Fitch Rates the Offering 'BBB'

Sep 3, 2013 5:01 PM   By Jeff Miller
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RAPAPORT... Macy's Inc. priced a public offering of $400 million aggregate principal amount of senior notes that would be due 2023 by its wholly owned subsidiary, Macy's Retail Holdings Inc. The senior notes were issued at a price of 99.314 percent of par value and will bear an annual interest at a rate of 4.375 percent. The senior notes will be fully and unconditionally guaranteed on a senior unsecured basis by Macy's Inc. The transaction is expected to close on or about September 6, 2013.

Shares in Macy's ended the day flat at $44.28 on the New York Stock Exchange (NYSE).

Macy's Retail Holdings will use the net proceeds for general corporate purposes, which may include working capital, capital expenditures, retirement of indebtedness and repurchasing outstanding common stock of Macy's Inc.

Fitch Ratings assigned a rating of ''BBB'' to the proposed issue.  As of August 3, 2013, the most recent reporting period, Macy's had $6.9 billion of debt outstanding, including capital leases. Fitch assigned the rating based upon Macy's  strong and growing market share of the department store sector, above-average operating margins, and the company's ability to generate strong free cash flow. While Macy's first-half sales performance was weaker than expected, Fitch expects the company's EBITDA (adjusted for stock-based compensation) will remain above $3.8 billion and free cash flow to be around the $1 billion level in 2013.

Fitch expects Macy's will continue to increase market share over the next three years on top-line growth of 2 percent to 3 percent relative to Fitch's industry growth expectations of between flat to a contraction of 1 percent.  Fitch expects Macy's to maintain leverage in the mid-2.0-times range in the next two years, assuming low single-digit growth in comparable-store sales and EBITDA.

Additionally, Fitch expects Macy's annual free cash flow to remain at the $1 billion level over the next three years, which, along with incremental debt, is expected to be directed toward share repurchases. Capital expenditures are expected to be in the range of $925 million to $1 billion as the retailer invests more in its store base and continues to fund growth-related initiatives. The ratings agency defined Macy's pension funding needs as modest given the 95 percent funded status.

Macy's liquidity remains strong, supported by a cash balance of $1.4 billion as of August 3 and a $1.5 billion credit facility. Fitch expects the company to refinance upcoming debt maturities and manage share buybacks within the context of maintaining its targeted adjusted leverage of 2.4-times to 2.7-times. Debt maturities over the next 12 months include $453 million due July 2014. Fitch gave Macy's rating outlook as ''Stable.''

Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as joint book-running managers for Macy's proposal. Jones Day is acting as counsel to Macy's Inc. and Macy's Retail Holdings.

Macy's operates about 840 department stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of ''Macy's'' and ''Bloomingdale's,'' as well as the macys.com and bloomingdales.com websites. The company also operates 13 Bloomingdale's Outlet stores.

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Tags: bbb, capital, financing, Fitch, Jeff Miller, macy's, offering, ratings, senior notes
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