NEW YORK -- For Federated Department Stores, the purchase of 50 percent of Prudential's claim against R.H. Macy & Co. has little downside risk, according to analysts.
The Prudential loan pays interest of 12 percent a year and is secured by mortgages on 70 Macy stores. This puts it at the top of the heap of claims against the chain and the loan should be repaid in full before bank creditors, trade creditors or bond holders get anything.
Federated bought the 50 percent interest in the Prudential claim for $449.3 million and has an option to buy the rest. In addition to a cash payment of $109 million, Federated gave Prudential a three-year note for $340 million.
Interest on the note in the first year will be the London Interbank Offering Rate (LIBOR) plus 1.75 percent and, in the next two years, it will be LIBOR plus 2 percent. According to analysts, this translates to an overall interest rate of about 5 percent a year, giving Federated a 7-point spread over the interest costs on the note.
Thus, if Federated is unable to work a deal to acquire Macy's or any part of it, it should still make money on the claim.
One analyst said Federated's return on equity would be in double digits if all the interest on the Prudential loan is paid.
As to the price Federated paid for the Prudential loan, it either paid a premium or it bought the claim at a discount, depending on whether all the accrued interest is paid. In Macy's Chapter 11 proceeding, interest on the loan is being accrued but is not being paid. If the court finds that the value of the collateral exceeds the value of the loan, the interest would be paid, according to analysts.
Federated paid an 8 percent premium on the principal of the loan. However, with interest, the Prudential loan is worth 24 percent more than the principal, or a total of about $1 billion.
A Prudential spokesman said the benefit for the insurance giant is that it gets to convert a large portion of a nonperforming loan into a performing loan. Under accounting rules, Prudential must set up a reserve for the entire loan. Now it can classify part of it as "performing." In addition, Prudential gets $109 million in cash, he said.
“I see things on the hanger and I’m, like, ‘I never knew that color worked on me.’ It’s things you necessarily wouldn’t choose to wear, but once you put them on, you see why Janie is who Janie is." — Lily Collins on working with former "Mad Men" costume designer, Janie Bryant on creating looks for her role as Celia Brady's in Amazon series, "The Last Tycoon." 📸@jilliansollazzo #wwdeye
EXCLUSIVE: Sarah Rutson has been tapped to Build New American Fashion Group. The parent of Joie, Equipment and Current/Elliott hired the merchant to rev up its brands and expand its portfolio into designer, beauty and lifestyle categories. Read more on WWD.com, link in bio. #wwdfashion
Michael Kors' $1.3B Jimmy Choo deal has the company squaring off with Coach Inc. as both seek to build American powerhouses. Coach bought Stuart Weitzman in 2015 and Kate Spade just two weeks ago, but Michael Kors' acquisition may be putting pressure on its rival in the new push for scale. #wwdnews (📷: George Chinsee)
Meet actress Lucy Boynton, who plays opposite Naomi Watts in the recently released Netflix series "Gypsy." Boynton stopped by WWD to talk about her upcoming projects and her nomadic lifestyle. Get all the details on WWD.com. #wwdeye (📷: @dandoperalski)