BofA On A Possible Macy's $5B Debt Raise: 'Taking The Right Steps'

CNBC reported last week that Macy's Inc M was looking to issue as much as $5 billion in debt, backed by around $3 billion in inventory and between $1 billion and $2 billion of real estate.

Given the massive decline in Macy’s sales, the move to seek additional financing to strengthen its balance sheet does not come as a surprise, according to BofA Securities.

The Macy's Analyst

Lorraine Hutchinson maintained an Underperform rating on Macy’s with a $5 price target.

The Macy's Thesis

BofA’s high-yield credit analyst Bill Reuter estimates that a part of this financing would replace the existing revolver draw of $1.5 billion, Hutchinson said in a Monday note. (See her track record here.)

“We think Macy’s is taking the right steps to weather this unprecedented disruption,” the analyst said. This also increases risk to the equity value, which warrants the Underperform rating, she said. 

Hutchinson estimates that incremental debt of $3 billion could increase annualized interest expenses by around $175 million, which translates to 43 cents per share, or 15% of earnings.

A deal of around $4 billion to $5 billion could include a new asset-based loan of between $3.4 billion and $3.6 billion, secured by inventory and between $1 billion and $2 billion of new bonds secured by owned real estate, the analyst said.

Asset-based loans are “among the cheapest ways for retailers to borrow money as inventory and accounts receivables are solid collateral with a history of covering outstanding borrowings,” Hutchinson said. 

M Price Action

Shares of Macy’s were up 5.2% at $5.28 at the time of publication Monday. 

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