Annual report pursuant to Section 13 and 15(d)

Financing

Financing

12 Months Ended

Jan. 28, 2017

The Company’s debt is as follows:



	January 28, 2017			January 30, 2016
	(millions)
Short-term debt:
7.45% Senior debentures due 2017	$	300		$	—
5.9% Senior notes due 2016	—			577
7.45% Senior debentures due 2016	—			59
Capital lease and current portion of other long-term obligations	9			6
	$	309		$	642
Long-term debt:
2.875% Senior notes due 2023	$	750		$	750
3.875% Senior notes due 2022	550			550
4.5% Senior notes due 2034	550			550
3.45% Senior notes due 2021	500			500
3.625% Senior notes due 2024	500			500
6.375% Senior notes due 2037	500			500
4.375% Senior notes due 2023	400			400
6.9% Senior debentures due 2029	400			400
6.7% Senior debentures due 2034	400			400
7.45% Senior debentures due 2017	—			300
6.65% Senior debentures due 2024	300			300
7.0% Senior debentures due 2028	300			300
6.9% Senior debentures due 2032	250			250
5.125% Senior debentures due 2042	250			250
4.3% Senior notes due 2043	250			250
6.7% Senior debentures due 2028	200			200
6.79% Senior debentures due 2027	165			165
7.875% Senior debentures due 2036	—			108
8.75% Senior debentures due 2029	61			61
8.5% Senior debentures due 2019	36			36
10.25% Senior debentures due 2021	33			33
7.6% Senior debentures due 2025	24			24
7.875% Senior debentures due 2030	18			18
9.5% amortizing debentures due 2021	14			17
9.75% amortizing debentures due 2021	8			9
Unamortized debt issue costs	(29		)	(32		)
Unamortized debt discount	(16		)	(16		)
Premium on acquired debt, using an effective interest yield of 5.542% to 6.021%	121			143
Capital lease and other long-term obligations	27			29
	$	6,562		$	6,995

Interest expense and premium on early retirement of debt is as follows:



	2016			2015			2014
	(millions)
Interest on debt	$	392		$	393		$	411
Amortization of debt premium	(22		)	(21		)	(12		)
Amortization of financing costs and debt discount	5			6			7
Interest on capitalized leases	2			2			2
	377			380			408
Less interest capitalized on construction	10			17			13
Interest expense	$	367		$	363		$	395
Premium on early retirement of debt	$	—		$	—		$	17

On August 15, 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in 2016 benefited from the recognition of unamortized debt premium associated with this debt.

On August 17, 2015, the Company redeemed at par the principal amount of $76 million of 8.125% senior debentures due 2035, pursuant to the terms of the debentures. Interest expense in 2015 benefited from the recognition of unamortized debt premium associated with this debt.

On November 14, 2014, the Company provided a notice of redemption related to all of the $407 million of 7.875% senior notes due 2015, as allowed under the terms of the indenture. The price for the redemption was calculated pursuant to the indenture and resulted in the recognition of additional interest expense of $17 million during 2014. This additional interest expense is presented as premium on early retirement of debt on the Consolidated Statements of Income.

Future maturities of long-term debt, other than capitalized leases, are shown below:



	(millions)
Fiscal year
2018	$	6
2019	42
2020	539
2021	553
2022	—
After 2022	5,319

During 2016, 2015 and 2014, the Company repaid $636 million, $69 million and $453 million, respectively, of indebtedness at maturity.

On December 7, 2015, the Company issued $500 million aggregate principal amount of 3.45% senior notes due 2021, the proceeds of which were used for general corporate purposes.

On November 18, 2014, the Company issued $550 million aggregate principal amount of 4.5% senior notes due 2034. This debt was used to pay for the redemption of the $407 million of 7.875% senior notes due 2015 described above.

On May 23, 2014, the Company issued $500 million aggregate principal amount of 3.625% senior unsecured notes due 2024, the proceeds of which were used for general corporate purposes.

The following table shows the detail of debt repayments:



	2016		2015		2014
	(millions)
5.9% Senior notes due 2016	$	577	$	—	$	—
7.875% Senior notes due 2036	108		—		—
7.45% Senior debentures due 2016	59		—		—
7.5% Senior debentures due 2015	—		69		—
8.125% Senior debentures due 2035	—		76		—
5.75% Senior notes due 2014	—		—		453
7.875% Senior debentures due 2015	—		—		407
9.5% amortizing debentures due 2021	4		4		4
9.75% amortizing debentures due 2021	2		3		2
Capital leases and other obligations	1		—		4
	$	751	$	152	$	870

The following summarizes certain components of the Company’s debt:

Bank Credit Agreement

The Company entered into a new credit agreement with certain financial institutions on May 6, 2016 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. The agreement is set to expire May 6, 2021 and replaced the prior agreement which was set to expire May 10, 2018.

As of January 28, 2017, and January 30, 2016, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement throughout all of 2016 and 2015. In addition, there were no standby letters of credit outstanding at January 28, 2017 and there were less than $1 million of standby letters of credit outstanding at January 30, 2016. Revolving loans under the credit agreement bear interest based on various published rates.

The Company's credit agreement, which is an obligation of a 100%-owned subsidiary of Macy’s, Inc. (“Parent”), is not secured. However, Parent has fully and unconditionally guaranteed this obligation, subject to specified limitations. The Company’s interest coverage ratio for 2016 was 7.36 and its leverage ratio at January 28, 2017 was 2.38, in each case as calculated in accordance with the credit agreement. The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The interest coverage ratio is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, non-recurring cash charges not to exceed in the aggregate $300 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt is adjusted to exclude the premium on acquired debt and net interest is adjusted to exclude the amortization of premium on acquired debt and premium on early retirement of debt.

A breach of a restrictive covenant in the Company’s credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company’s senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company’s senior notes and debentures that contain cross-default provisions would also be subject to acceleration.

Commercial Paper

The Company is a party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement described above. The issuance of commercial paper will have the effect, while such commercial paper is outstanding, of reducing the Company’s borrowing capacity under the bank credit agreement by an amount equal to the principal amount of such commercial paper. During 2016 and 2015, the Company utilized seasonal borrowings available under this commercial paper program. The amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter. As of January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.

This program, which is an obligation of a 100%-owned subsidiary of Macy’s, Inc., is not secured. However, Parent has fully and unconditionally guaranteed the obligations.

Senior Notes and Debentures

The senior notes and the senior debentures are unsecured obligations of a 100%-owned subsidiary of Macy’s, Inc. and Parent has fully and unconditionally guaranteed these obligations (see Note 16, “Condensed Consolidating Financial Information”).

Other Financing Arrangements

At January 28, 2017 and January 30, 2016, the Company had dedicated $37 million of cash, included in prepaid expenses and other current assets, which is used to collateralize the Company’s issuances of standby letters of credit. There were $30 million and $21 million of other standby letters of credit outstanding at January 28, 2017 and January 30, 2016, respectively.