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Macy’s launches another tender

| December 6, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Continuing with its commitment to further reduce debt in fiscal 2019, Macy’s (M) launched a $450 million waterfall tender offer for 15 series of notes. Similar to previous tenders, management has set an early tender date with a financial incentive: a tender spread which includes a 3 point premium for all bonds. Despite weaker than expected 3Q results, estimated leverage of 2.7x is currently within the targeted range; the tender will to help offset any further EBITDA decline.

Tender details

M’s top three priorities in the tender offer are front end bonds that have not been tendered for previously, given their lower coupon rates relative to the rest of the capital structure. Highlighted in Exhibit 1 are the bonds that have the largest tender spread premiums from trading levels prior to the tender announcement. In order to receive the premium, holders need to tender their bonds by 5pm NYC time on 12/16/19. In most cases, tendering after the early tender date is not advisable as the early tender premium accounts for over 100% of the spread upside. The tender is set to expire on 11:59pm NYC time on 12/31/19.

Exhibit 1: M waterfall tender with spread premiums

Source: M press release, Amherst Pierpont Securities

S&P outlook to negative

The tender announcement comes on the heels of a weaker than anticipated 3Q which prompted S&P to change its outlook on its BBB- rating to negative from stable. M’s weaker quarter was underscored by a 3.5% same store sales (SSS) decline on an owned and licensed basis. Management chalked up the decline to lower mall traffic, weaker tourism and unseasonably warm weather. The magnitude of the weakness in the quarter forced M to reduce full year sales guidance despite noting that it was ready to execute on a strong holiday season. S&P noted that the outlook revision not only reflects the recent underperformance, but its expectation that further risks to operating performance remain. While promotional activity was reduced in the quarter to preserve margins, it resulted in lost market share as the off price retailers witnessed solid SSS gains. TJX saw SSS up 4% in the quarter while ROST posted a 5% gain.

Debt reduction a credit strength 

While the operating performance is a negative, the company’s continued focus on the balance sheet and debt reduction remains a positive. Despite EBITDA falling 25% over the past 4 years, the company has repaid approximately $3 billion of debt. This focus on debt reduction has enabled M to keep adjusted leverage below 3.0x.  The company used both non-core asset sale proceeds and free cash flow to fund its debt reduction efforts. M continues to target adjusted leverage in the 2.5x-2.8x range. Estimated leverage is currently within that range at approximately 2.7x. Leverage is not expected to decline much, if at all, with the above tender as it will help to offset any further EBITDA decline.

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