MESSAGE
| DATE | 2020-06-16 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [Hangout - NYLXS] Chances of Macy's return is looking slim
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wolfstreet.com
Can Macy’s Survive this Crisis Without Filing for Bankruptcy?
7-9 minutes
Its unsecured bonds crashed 53% since Feb 14. It has been living off its
real estate portfolio of “owned boxes” for years by selling them.
By Wolf Richter for WOLF STREET.
Macy’s, the largest surviving department store in the US, and still
clinging by its fingernails to the last rung of the top 10 ecommerce
retailers in the US, down from 7th place in 2019, may never reopen many
of its stores that it hadn’t already decided to shutter before the crisis.
In 2019, 26% of its $24.5 billion in sales were online sales, up from
23% a year earlier, according to its 10-K filing with the SEC. In the
second quarter (February through April), as all its stores were closed
on March 18, the percentage of digital sales to total sales will surge.
But it won’t be enough.
Investors have lost faith, demonstrated amply by the crash of its 7.0%
senior unsecured 30-year bond due in February 2028. The bonds have been
in deeply distressed territory since mid-March. Since February 14, they
have collapsed by 53%, to a new low on Tuesday of 54.1 cents on the
dollar, giving them a yield of 18.6% (chart via Finra-Morningstar):
Macy’s is not out of cash. At the end of its fiscal year on February 1,
it had $685 million in cash and cash equivalents on hand. On March 20,
it said that it drew its entire credit line of $1.5 billion as
“proactive measure.” So that would be close to a total of $2.2 billion
in cash. But part of the cash has already been burned.
The bond market believes that there is a decent chance these $2.2
billion and whatever else Macy’s may be able to pull out of its hat –
more on that in a moment – will get it through the first part of 2021
without filing for bankruptcy. This is shown by its $500 million in
senior unsecured 3.45% notes that are due on January 15, 2021. These
notes traded at 92.5 cents on the dollar today. This indicates that the
market still sees a decent chance of getting paid face value in January,
2021.
It’s never comforting for bondholders when the Chief Financial Officer
of a company in distress suddenly departs. But that’s what happened on
April 7, when Macy’s announced that CFO Paula Price would “voluntarily
depart,” effective May 31. Macy’s is now scrambling to find a successor.
After her departure, she will stay on as an advisor for six months to
smoothen out the transition, for $510,000 in advisory fees and other
benefits worked out in the agreement.
Ms. Price was likely instrumental in Macy’s decision to lay off “the
majority” of its 123,000 employees after it had closed all its Macy’s,
Bloomingdale’s and Bluemercury stores on March 18.
Macy’s vendors, if they’re worried about getting paid for their
merchandise and want to obtain credit insurance, face a new challenge:
Two of the largest credit insurance providers, Coface SA and Euler
Hermes Group SAS, have stopped writing policies to cover Macy’s, said
people with knowledge of the matter, according to Bloomberg today. This
is a sign that insurers have lost faith in Macy’s ability to pay its
vendors.
This whole thing is going to be a mess. If Macy’s stores reopen in the
summer, the merchandise – the part it couldn’t sell online – will have
been there for months. With some things, that’s OK. With other things,
it’s not. But vendors might be getting skittish, now that credit
insurance is harder to come by, or more expensive.
Vendors may begin to protect themselves, limiting their exposure and
demanding shorter payment terms – the opposite of what Macy’s had
announced in March, that it would be “extending payment terms” to
stretch out its cash. This will make it even harder for Macy’s to
restock its stores with appropriate fresh merchandise before they reopen.
To stay out of bankruptcy court, Macy’s is now trying to pull a big
rabbit out of the hat: borrow up to $5 billion, secured by stores it
owns and by merchandise, sources told CNBC and Bloomberg last week.
The sources said that $3 billion of the debt could be backed by
inventories as collateral. And that $1 billion to $2 billion could be
backed by real estate.
Macy’s owns 342 of 775 stores it still operated as of February 1. None
of these “owned boxes,” as it calls them, were encumbered by a mortgage,
it said in its 10-K. It also owns some other properties. For years
already, Macy’s has been “monetizing,” as it calls it, this real estate
portfolio through the sale of properties.
In one of the most expensive property markets in the US, San Francisco,
Macy’s already sold three of its four stores:
2016: its 263,000 sq. ft. Men’s Store on Stockton St. (now being
redeveloped into offices and mixed use) a couple of blocks from Union
Square, for $275 million.
2017: its 280,000 sq. ft. store at the Stonestown Galleria (an aging
mall with plans to redevelop it, including possibly into housing) for
$41 million.
2019: its historic 250,000-square-foot I. Magnin building at Union
Square for $250 million.
By now, the proceeds from those sales have been used up. Macy’s still
owns its last remaining store in San Francisco, its flagship 700,000
square-foot store facing Union Square, the largest department store in
the Bay Area.
Its other crown-jewel “owned box” is its Herald Square location in
Manhattan. But the source that disclosed the efforts to raise up to $5
billion said that it would not be used as collateral. The remaining
“owned boxes” are much less valuable, and some of them may have little
value.
Macy’s has been living off its real-estate sales for years. But it still
has significant resources in its property portfolio that it could
leverage, including, if push comes to shove, its San Francisco Union
Square store and its Manhattan Harold Square store.
This comes in an era when, according to Green Street Advisors, mall
properties across the US have lost about 30% of their value since 2016,
and 20% year-over-year in March. With the total brick-and-mortar
meltdown now under way, and with the new uncertainties of the health
crisis going forward, and with the current issues in the commercial
mortgage-backed securities (CMBS) market, selling retail properties is
going to be tough; using them as collateral for new debt might be easier.
Macy’s might burn through $2 billion in cash this year. It has to
refinance the $500 million bond in January 2021. It also has to
refinance a $450 million bond in January 2022. And it will continue to
burn cash in 2021. So the cash proceeds from the $4 billion or $5
billion in new debt, if Macy’s succeeds in selling it, may get it
through 2021. But then what?
It will be getting close to the end of its rope. For a while longer, it
can continue to burn its furniture to stay warm, so to speak, and like
Sears Holdings, ruin its brand and collapse into worthless debris.
If Macy’s can use a bankruptcy filing sooner rather than later to shed
most of its stores, keep a few flagship stores, lighten its debt load,
and concentrate its remaining resources on building its online brand and
fulfillment infrastructure, it might have a better chance of staying
relevant as an internet brand — and forget the department store.
The old saw that dividend stocks are good for bear markets is actually a
high-risk gamble. Read… Dividend Massacre in This Crisis is Already
Breaking Records, But it Just Started
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