Nov. 20 (Bloomberg) -- Macy’s Inc., the second-biggest U.S. department-store company, is headed into the holidays facing the possibility of losing its 11-year-old investment-grade rating.

Macy’s debt has started trading like a junk bond, a signal that ratings companies may demote the owner of Bloomingdale’s department stores to non-investment grade. That would increase the company’s cost of raising funds at a time when capital is increasingly difficult to come by and the retailer is preparing for about $1 billion in 2009 debt repayments.

The holiday selling season, which accounted for about four- fifths of Cincinnati-based Macy’s profit last year, may be the worst since at least 2002 as cash-strapped consumers rein in spending. That will put more pressure on the company, which emerged from bankruptcy in 1992 and has been debt-laden since its $11 billion acquisition of May Department Stores Co. in 2005.

“The last thing Macy’s needs at this point is a downgrade,” Pete Hastings, a fixed-income analyst with Morgan Keegan & Co. in Memphis, said today. “They’ve got enough trouble the way the economy is going, and this would just make things tougher for them.”

Macy’s bonds are trading at levels similar to those of Sears Holdings Corp., the owner of discount retailer Kmart, and Limited Brands Inc., which owns the Victoria’s Secret lingerie chain, in high-yield, high-risk non-investment-grade territory.

Junk Territory

The extra yield, or spread, that investors demand to own Macy’s 5.35 percent notes due 2012 instead of similar-maturity Treasuries was almost 18 percentage points today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

That was greater than the 13.8 percentage-point spread on non-investment-grade BB rated bonds, according to Merrill Lynch & Co. index data. A basis point is 0.01 percentage point.

Moody’s Investors Service said Oct. 15 that it had a “negative” outlook on Macy’s Baa3 rating -- the lowest investment grade -- meaning it was more inclined to downgrade the retailer. Standard & Poor’s Corp. did the same on Oct. 10. They may next put Macy’s on review for a downgrade, or simply cut ratings without the interim step.

‘Not Ordinary Times’

“Ordinarily they wait until the holiday season is over to make changes to retailing ratings, but these are not ordinary times,” Carol Levenson, an analyst with Gimme Credit LLC in Chicago, said Oct. 15. “Given the agencies’ waning credibility in other areas, they may be quicker to pull the trigger on marginal names such as Macy’s than they would have been before the credit crisis.”

The day before Moody’s changed its outlook, the Macy’s spread was about 700 basis points, compared with more than 900 basis points for BB rated bonds.

“Our intent is to maintain our investment grade rating because it provides us access to that market,” Jim Sluzewski, a company spokesman, said by telephone yesterday.

The company plans to pay off debt due next year with cash and may use its $2 billion credit facility, he said. It has borrowed $150 million, he said.

That plan may impair the retailer, Hastings said in a telephone interview.

“If they use cash on the balance sheet to reduce debt to keep the investment grade, they would have less flexibility to weather the downturn,” he said.

Cash Vs. Flexibility

Sales at stores open at least a year may fall as much as 6 percent in the fourth quarter, after dropping in 10 of the last 11 quarters, Macy’s said.

“Poor comparable sales, or comparable sales purchased with heavy promotions that sacrifice margins will likely place heavy ratings pressure on Macy’s,” Hastings wrote in a Nov. 12 report.

The cost of insuring the retailer’s bonds from default has risen to levels investors consider distressed. Purchasers of Macy’s credit-default swaps had to pay 17.13 percent of the amount being protected upfront today, 1.8 percentage points more than yesterday, according to CMA Datavision.

A rating downgrade can depresses demand for bonds because some funds prohibit investing in junk. The rating increases borrowing costs by forcing the company to offer investors a higher interest rate to assume more risk.

Macy’s would be joining General Motors Corp. and a growing number of so-called fallen angels -- former investment-grade companies. There were 40 as of Nov. 11, compared with 29 a year earlier, according to an S&P report.

Fallen Angels

Fifty-seven more, including Macy’s, are at risk of being downgraded to speculative grade, S&P said.

Macy’s, which runs more than 850 stores, has $350 million of bonds coming due in April and about $600 million in July, according to data compiled by Bloomberg.

Its total $9.8 billion of debt is more than double that of any of its main rivals: Nordstrom Inc., J.C. Penney and Kohl’s Corp.

The chain’s cash, used to pay employees and buy merchandise, totaled $300 million as of Nov. 1, compared with $275 million a year earlier. Its total current assets were $7.87 billion, down from $8.01 billion a year earlier.

The retailer’s ratio of debt to earnings before interest, taxes, depreciation and amortization -- a measure of earnings that the credit rating companies track -- rose to 3.17 times in the third quarter, from 3.04 times a year earlier. Junk-rated Sears has a ratio of 1.82.

Seven analysts surveyed by Bloomberg estimate Ebitda will slide 24 percent in Macy’s fourth quarter.

Investor concern about financing has also hurt Macy’s shares, according to Liz Dunn, an analyst with Thomas Weisel Partners LLC in New York. The stock rose 17 cents, or 3 percent, to $5.85 at 4:15 p.m. in New York Stock Exchange trading. They have sunk by 70 percent in the last three months.

“The shares of retailers with debt, or any perceived funding need, are getting killed in this environment,” said Dunn, who has an “overweight” rating on the stock. “We think Macy’s has adequate liquidity, but the market apparently is taking a more bearish view.”

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

Last Updated: November 20, 2008 18:59 EST