Annual report pursuant to Section 13 and 15(d)

Financing

Financing

12 Months Ended

Feb. 03, 2018

The Company’s debt is as follows:



	February 3, 2018			January 28, 2017
	(millions)
Short-term debt:
7.45% Senior debentures due 2017	$	—		$	300
Capital lease and current portion of other long-term obligations	22			9
	$	22		$	309
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	269			500
4.375% Senior notes due 2023	400			400
6.9% Senior debentures due 2029	397			400
6.7% Senior debentures due 2034	264			400
6.65% Senior debentures due 2024	296			300
7.0% Senior debentures due 2028	298			300
6.9% Senior debentures due 2032	31			250
5.125% Senior debentures due 2042	250			250
4.3% Senior notes due 2043	250			250
6.7% Senior debentures due 2028	197			200
6.79% Senior debentures due 2027	165			165
8.75% Senior debentures due 2029	18			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	12			18
9.5% amortizing debentures due 2021	10			14
9.75% amortizing debentures due 2021	6			8
Unamortized debt issue costs	(25		)	(29		)
Unamortized debt discount	(13		)	(16		)
Premium on acquired debt, using an effective interest yield of 5.542% to 7.144%	67			121
Capital lease and other long-term obligations	26			27
	$	5,861		$	6,562

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



	2017			2016			2015
	(millions)
Interest on debt	$	332		$	392		$	393
Amortization of debt premium	(9		)	(22		)	(21		)
Amortization of financing costs and debt discount	7			5			6
Interest on capitalized leases	2			2			2
	332			377			380
Less interest capitalized on construction	11			10			17
Interest expense	$	321		$	367		$	363
Net premiums on early retirement of debt	$	(10	)	$	—		$	—

During December 2017, the Company completed a tender offer and purchased $400 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2032, $108 million of 6.7% senior debentures due 2034, $96 million of 6.375% senior notes due 2037, $43 million of 8.75% senior debentures due 2029, and $6 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $423 million. The Company recognized $11 million of income related to the recognition of the unamortized debt premium partially offset by the redemption premium and other costs associated with this debt as net premiums on early retirement of debt on the Consolidated Statements of Income during 2017.

During the first and second quarters of 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cash cost of $257 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during 2017 presented as net premiums on early retirement of debt on the Consolidated Statements of Income.

During August 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.

During August 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.

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



	(millions)
Fiscal year
2019	$	42
2020	539
2021	553
2022	—
2023	1,150
After 2023	3,522

During 2017, 2016 and 2015, the Company repaid $300 million, $636 million and $69 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.

The following table shows the detail of debt repayments:



	2017		2016		2015
	(millions)
7.45% Senior debentures due 2017	$	300	$	—	$	—
6.375% Senior notes due 2037	231		—		—
6.9% Senior debentures due 2032	219		—		—
6.7% Senior debentures due 2034	136		—		—
8.75% Senior debentures due 2029	43		—		—
7.875% Senior debentures due 2030	6		—		—
6.65% Senior debentures due 2024	4		—		—
6.9% Senior debentures due 2029	3		—		—
6.7% Senior debentures due 2028	3		—		—
7.0% Senior debentures due 2028	2		—		—
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
9.5% amortizing debentures due 2021	4		4		4
9.75% amortizing debentures due 2021	2		2		3
Capital leases and other obligations	1		1		—
	$	954	$	751	$	152

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 as of 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 February 3, 2018, and January 28, 2017, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement during 2017 and 2016. In addition, there were no standby letters of credit outstanding at February 3, 2018 and January 28, 2017. 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. 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 Company’s interest coverage ratio for 2017 was 8.94 and its leverage ratio at February 3, 2018 was 2.04, in each case as calculated in accordance with the credit agreement. 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, the Company utilized seasonal borrowings available under this commercial paper program. Over the past two fiscal years, the amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter of 2016. There were no borrowings under the program during 2017. As of February 3, 2018 and 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 February 3, 2018 and January 28, 2017, 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 $28 million and $30 million of other standby letters of credit outstanding at February 3, 2018 and January 28, 2017, respectively.