S&P Global lowered the debt ratings of Macy’s as the rating agency expects prolonged effects of social distancing and a weak environment for discretionary spending will intensify pressures on the department store sector. S&P said Macy’s also faces sizable upcoming debt maturities over the next several years and potential covenant compliance issues under its revolving credit facility.
The ratings lowered include Macy’s issuer credit rating to ‘B+’ from ‘BB’.
The negative outlook reflects the risk of a lower rating if the impact of the coronavirus pandemic lasts longer than we anticipate so that Macy’s is unable to reopen stores, resulting in liquidity or credit metrics that are worse than our current forecast.
S&P said in a statement, “The downgrade reflects greater anticipated stress on performance and its expectation that adjusted leverage will exceed 4x through 2021. Our economists’ now forecast a severe contraction in the domestic economy, with real GDP contracting 5.2 percent in 2020, reflecting a longer and more intense economic impact from the coronavirus pandemic than previous. We expect recessionary conditions will depress consumer confidence and demand for Macy’s discretionary merchandise mix. We assume a gradual re-opening of nonessential retail stores through the second quarter depending on federal and state government guidelines but for foot traffic to remain low and economic overhang to reduce demand. Based on our updated macroeconomic and revenue assumptions, we now anticipate leverage will be meaningfully above our prior downside threshold of 4x in 2021 even after further economic recovery as lingering impacts of the weak economy, ongoing secular pressure for department stores, and anticipated acceleration of Macy’s banner closures reduce nominal EBITDA from historic levels. As a result we are revising our financial risk profile assessment to aggressive from significant.
“The negative outlook reflects the possibility of a downgrade if performance or liquidity deteriorates further possibly due to further expansion of coronavirus shutdowns or if demand does not rebound meaningfully as stores do reopen.
“We could lower the ratings on Macy’s if sales and profits remain depressed from a prolonged pandemic or macroeconomic slump, or from a weakened competitive position such that we expect leverage to be sustained at more than 5x. We could also lower the rating if cash burn fails to recede such that we believe the company’s existing cash balance is being depleted without offsetting measures to supplement liquidity sources or if we do not expect meaningfully positive free operating cash flow generation in 2021 and beyond. We could also lower the ratings if we believe the company would have difficulties securing a waiver or amendment to its credit agreement under adequate terms, or repaying or refinancing debt maturities in a timely manner.
“We could revise the outlook to stable if we expect Macy’s to sustain leverage of less than 5x and generate meaningfully positive free operating cash flow through operations as opposed to asset sale proceeds. In this scenario, we would also expect the company to maintain sufficient liquidity to fund store re-openings and seasonal inventory purchases and to address debt maturities.”
