Macy’s Inc. said Wednesday that it amended its existing bank credit agreement, led by Bank of America and J.P. Morgan Chase & Co., and saw its shares soar.
While the size of the credit facility, $2 billion, and its Aug. 31, 2012, maturity day remain unchanged, the covenants were revised. First, a leverage covenant moves from debt-to-capitalization to debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization), which Macy’s said was a more market-based approach that eliminates from the calculation any potential future noncash goodwill or asset impairment charges. Analysts previously had expressed concern that, under the earlier credit arrangement, a write-down of Macy’s assets could have put it out of compliance with existing covenants.
Macy’s shares jumped on the news of the new arrangement, ending the day at $10.01, up $1.54 or 18.2 percent. Only 21 companies listed on the New York Stock Exchange finished the day with a larger percentage gain. (For more stock results, see story on page 20.)
Also, the interest coverage ratio was reduced to 3 versus the current 3.25 through Oct. 30, 2010, when it reverts to 3.25. In return for these covenant changes, fees and pricing were increased. Interest coverage ratio is earnings before interest and taxes divided by interest expense during a given period.
The agreement is effective Jan. 5, 2009.
“Macy’s is managing its capital structure and credit facilities in a prudent and conservative manner,” said Terry J. Lundgren, Macy’s chairman, president and chief executive officer. “While we have remained well within the requirements of the existing bank credit agreement and expect to remain so, we believe it was appropriate to proactively pursue amendments that would permit continued financial flexibility in the current uncertain economic environment. Especially given our strong cash flow and healthy balance sheet, this action should remove any question about the financial strength of Macy’s Inc., including our ability to retire $950 million in debt that is maturing in 2009.”
Macy’s said the facility provides “substantial liquidity for the company to weather the current economic downturn” and noted it has no current borrowings against this credit agreement, and the 2008 fall season peak borrowing needs (now fully repaid) were $163 million, compared to approximately $1 billion last year.
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