Demand strong for May bonds despite ratings cut

Tue Jul 13, 2004
By Eric Burroughs

NEW YORK, July 13 (Reuters) - May Department Stores has just had its debt ratings slashed and could see them hurt even more if it pursues its acquisition policy, but credit investors still seem surprisingly sanguine about the company.

Demand is strong for the $2.2 billion of bonds May is selling to help finance its $3.2 billion acquisition of 71 department stores from Target Corp._(TGT.N: Quote, Profile, Research) . The bonds were launched on the tight side of expectations.

In the credit derivatives market, the company's credit spreads improved after Moody's Investors Service and Standard & Poor's Ratings Services issued a stable outlook on the company's debt ratings after knocking them down a notch. Some had feared a negative outlook or larger downgrade to the ratings.

Portfolio managers are keen for the company's bonds because issuance has been so light lately. Plus, in a conference call with bond investors on Tuesday, May executives said they were still committed to debt reduction and have suspended a share buyback program, traders and analysts said.

But the May executives also failed to rule out more strategic acquisitions -- such as a possible purchase of Dillard's Inc. (DDS.N: Quote, Profile, Research) or perhaps Barney's, which recently put itself up for sale. Dillard's remains tightly controlled by the Dillard family and cannot be purchased, although markets have long speculated it may be sold.

"I'm still concerned they could pursue an acquisition that would put pressure on the ratings," said Filippe Goossens, head of high-grade research and a retail analyst at Credit Suisse First Boston.

Goossens still has an "underperform" rating on May's credit because of the risk of more acquisitions, but also due to its generally poor performance compared with Federated Department Stores Inc. (FD.N: Quote, Profile, Research) , which lost the battle for Marshall Field's and 9 Mervyn's stores.

May paid a whopping $3.2 billion for the stores, far more than expected, and several analysts immediately expressed big reservations about the hefty cost for what was viewed as Marshall Field's poorly performing stores.

Moody's spoke somewhat favorably of the acquisition, saying: "Field's gives May a larger presence in three major metropolitan markets and a well-established banner that is as strong as any of May's existing ones."

Yet plenty of other analysts remain skeptical about how May intends to improve both its own sales and Marshall Field's. S&P noted Marshall Field's "has been a relatively poor performer for several years."

May's credit spreads brightened slightly on Tuesday. After May's five-year spread in credit default swaps traded above 80 basis points, it has rallied back to around 75 basis points, or $75,000 a year for default protection on $10 million of debt.

That spread had traded around 55 basis points before May announced the costly acquisition a month ago. By contrast, Federated Department Stores' five-year spread in credit default swaps trades at 61 basis points.

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