American credit market outlook

Credit spreads for Federated Department Stores have tightened this year, but many analysts believe rougher waters lie ahead as the company converts its recently acquired May Department Stores to the Macy's chain.
Federated, which completed its $12 billion acquisition of May Stores in August, is converting more than 400 May stores, including Filene's, Marshall Fields and Foley's, to the Macy's banner in a move to cut costs and boost sales.
Though Macy's could breathe new life into some of the languishing May stores with more upscale merchandise, it risks alienating some shoppers when it does that, analysts said.
"Consumers who are unfamiliar with the Macy's banners and favoured the old May stores may decide to migrate to competitors such as J.C. Penney," said Bear Stearns analyst Frank Henson.
A Federated spokesman could not be reached for comment.
Spreads on Federated's credit default swaps and bonds have tightened this year on the company's plans to reduce debt by selling duplicate stores. The company assumed about $6 billion of May debt in the acquisition, pushing total debt to about $10 billion.
"Once debt reduction is completed, though, credit investors are likely to focus on free cash flow, which we believe could be negative this fiscal year," Henson said. Clearance sales underway to make way for new merchandise will likely pressure profit margins, and higher capital expenditures required to integrate the May stores may also cut into free cash flow, he said.
Bear Stearns has an underweight recommendation on Federated's bonds and credit default swaps, seeing limited upside at current levels and a risk of spread widening if Federated has integration problems.
Though Federated's strategy of moving to one store brand makes sense, the effort of integrating May will absorb management's attention, and results could suffer in the interim, said Andrew Brady, analyst for fixed-income research service CreditSights.
He also has an underweight recommendation on Federated's bonds and default swaps, and said he sees better value for credit investors in some of Federated's peers such as Sears and J.C. Penney.