American credit market outlook

Macy's Inc is banking on the suspension of its share repurchase program and spending cuts to help it weather a severe slowdown in consumer spending and allow it to hold on to its investment grade ratings. If the economy and consumer spending deteriorate further than currently expected, however, the department store operator's ratings may fall out of its control.
Macy's last Friday slashed its full-year forecast, warning that sales could fall sharply in the back half of its fiscal year as shoppers stick to buying necessities. The company added that its cash needs have been reduced by its previously announced suspension of its share repurchase program, lower capital spending and disciplined management of inventories and expenses.
In spite of these cash conservation measures, the company's investment grade status may be lost if spending continues to dry up. "Macy's squandered cash on stock buybacks without concern for a possible downturn, and now the chickens are coming home to roost," said Carol Levenson, analyst at independent research firm Gimme Credit. Macy's spent $3.32 billion in 2007 and $2.5 billion in fiscal 2006 buying back shares. This followed a debt-financed acquisition of May Department Stores in 2005.
The cost to insure Macy's debt with credit default swaps hit a new high of 525 basis points on Thursday, or $525,000 per year for five years to insure $10 million in debt, compared with 358 basis points last Thursday, before the earnings warning, according to Markit Intraday. Standard & Poor's changed its outlook on Macy's to negative on Friday, followed by Moody's Investors Service on Wednesday.
Both agencies rate Macy's the lowest investment grade, and a negative outlook raises the risk the retailer will be cut into junk territory over the coming one to two years. "Given the lack of visibility into the holiday season (although prospects for sales and profits for all US retailers sure seem to be getting dimmer by the day) Macy's doesn't seem to have too far to go to be rated speculative grade," Levenson said.
Macy's said it now expects to earn $1.30 per share to $1.50 per share for fiscal 2008, excluding some impairment charges and costs tied to consolidating its divisions. It had previously forecast earnings of $1.70 per share to $1.85 per share, on that basis.