Macy’s 'Change-of-Control' Bonds Fall as Takeover Terms Become Less Clear

  • ‘Change-of-control’ clause tempts with promise of 101% payout
  • Analysts say company could avoid triggering that covenant

Investors have been buying the rumor when it comes to Macy’s Inc., bidding up its bonds that would benefit from a takeover after reports of a possible sale surfaced early this month. 

But not so fast, say analysts at CreditSights Inc.

Trading volume in Macy’s bonds surged about 500 percent after the Wall Street Journal reported on Feb. 2 that Hudson’s Bay had initiated takeover talks. The debt carries a change-of-control covenant that requires the company to pay back creditors at 101 percent of face value, forcing management to refinance an additional $4.25 billion if a deal goes through.

The notes with the change-of-control covenant rose as much as six points in the three days after the news broke. Meanwhile the older debt that doesn’t have the clause slumped. But reality may have set in since then as traders re-examine the bond terms. Most of the change-of-control notes subsequently pared their gains, with some erasing the surges altogether.

“It’s not a sure thing,” that bondholders would obtain a 101 percent payout even if a potential sale pans out, CreditSights analyst James Goldstein said in an interview. What’s more, Macy’s could take “several routes” to avoid triggering the change-of-control clause, he added.

Macy’s has a significant incentive to subvert the change-of-control clause in light of the added costs. Plus, an acquisition would trigger the new bonds’ covenants only if it resulted in a downgrade of the company’s credit ratings.

“There were a lot of people who thought, listen, if this goes through I’m getting paid 101,” Bloomberg Intelligence analyst Noel Hebert said in an interview. But “triggering the change of control doesn’t strike me as a terribly high-probability scenario.”

A representative for Macy’s didn’t immediately respond to requests for comment.

Macy’s joins a long list of retailers struggling to survive as shopping moves online and bargain sites continually offer cheaper prices. Under pressure from activist investor Starboard Value LP, the company in November inked a two-year deal with Brookfield Asset Management to monetize its real estate holdings. Then, on Jan. 4, Macy’s announced a “significant restructuring” of its operations that will close about 100 stores and cut thousands of jobs in order to save costs. And the retailer ousted its longtime chief executive officer, Terry Lundren.

And the hits keep coming. Macy’s and multiple peers logged negative comparable sales this holiday season, leading Moody’s to lower its outlook for the sector overall in 2017. Its bleak performance in that crucial shopping period led Macy’s to revise its 2016 earnings-per-share estimate to $2.95-$3.10 from $3.15-$3.40.