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Rating Action:

MOODY'S UPGRADES LONG-TERM RATINGS OF MAY DEPARTMENT STORES COMPANY (SENIOR UNSECURED TO Baa1) AND CONFIRMS MAY'S PRIME-2 RATING; ASSIGNS PRIME-2 TO FEDERATED RETAIL HOLDINGS, INC.; AFFIRMS RATINGS OF FEDERATED DEPARTMENT STORES, INC. ; OUTLOOK NEGATIVE

30 Aug 2005
MOODY'S UPGRADES LONG-TERM RATINGS OF MAY DEPARTMENT STORES COMPANY (SENIOR UNSECURED TO Baa1) AND CONFIRMS MAY'S PRIME-2 RATING; ASSIGNS PRIME-2 TO FEDERATED RETAIL HOLDINGS, INC.; AFFIRMS RATINGS OF FEDERATED DEPARTMENT STORES, INC. ; OUTLOOK NEGATIVE

Approximately $15.4 Billion of Debt Securities Affected

New York, August 30, 2005 -- Moody's Investors Service upgraded the ratings on the long-term senior unsecured debt of The May Department Stores Company, Inc. ("May"), assumed by Federated Retail Holdings,Inc., from Baa2 to the Baa1, the same level as the senior unsecured rating of Federated Department Stores, Inc. ("Federated") which acquired May today and has guaranteed May's long-term public debt. May's short-term rating of Prime-2 is confirmed but the Prime-2 rating on its commercial paper program, which has been terminated, will be withdrawn. Moody's assigned a Prime-2 short-term rating to the new commercial paper program of Federated Retail Holdings, Inc., which has assumed debt previously at Federated, based on a guarantee from Federated. The ratings on the debt of Federated Department Stores, Inc., assumed by Federated Retail Holdings, Inc. with the guarantee of Federated, are affirmed. The rating outlook is negative. May's long-term ratings were placed on review for possible downgrade on February 28, 2005 when Federated announced its plans to acquire May; Moody's review was changed to review direction uncertain on August 17, 2005 following the announcement that Federated would guarantee May's long-term public debt. May's short-term rating was placed on review for possible downgrade on February 28, 2005. Today's rating actions conclude these reviews.

May's public debt is now the obligation of a wholly owned subsidiary of Federated, Federated Retail Holdings, Inc. ("Federated Retail") and is guaranteed by Federated. Federated has contributed its principal operating subsidiaries to Federated Retail, caused Federated Retail to assume Federated's obligations under pre-acquisition Federated public debt, and has guaranteed this pre-acquisition Federated public debt. All of Federated's prior bank agreements and commercial paper agreements, as well as May's bank credit facilities, have been replaced with new facilities under which Federated Retail is the borrower and Federated the guarantor. As a result, all debt is now the obligation of the same corporate entity, is pari passu, and benefits from the guarantee of Federated.

In a separate press release yesterday, Federated's long-term rating of Baa1 and short-term rating of Prime-2 were confirmed, with a negative outlook. Federated's ratings are based on its geographically diversified department store operations, well recognized banners, merchandising expertise that has achieved generally positive comparable store sales increases, and free cash flow generation excluding acquisitions that is sufficient to fund debt repayments, dividends and share repurchases internally. The acquisition of May has expanded Federated's annual sales to nearly $30 billion, with stores in 64 of the country's largest 65 markets. The manageable physical overlap of Federated and May has limited planned store closures to date to a modest 76 locations (exceeding about $2 billion of combined sales). Re-branding of May's regional chains to the well-known Macy's banner and, more importantly, the re-merchandising of May's stores by Federated should boost the negative or anemic comparable store sales experienced by these stores during May's ownership. Opportunities to consolidate support functions should also contribute to projected synergies, estimated at $450 million by fiscal 2007 -- an aggressive amount, but not improbable given combined annual operating expenses of almost $8 billion in fiscal 2004. One-time costs, though, will total about $1 billion over the next three years.

Moody's has assigned a Prime-2 rating to the new $7 billion commercial paper program of Federated Retail, based on the guarantee of Federated. Any outstanding commercial paper will be backed by available, committed bank credit agreements, also guaranteed by Federated, aggregating $7 billion -- $2 billion 5 year revolving credit facility expiring in August 2010 and $5 billion 364 day revolving credit facility.

The rating outlook is negative, reflecting the risk that it could take Federated longer than 12-18 months post-acquisition to restore credit metrics to pre-acquisition levels. Federated has little cushion at the Baa1 level for softer than anticipated free cash flow or for slower than anticipated debt reduction.

Federated's Baa1 rating could be downgraded if asset sale proceeds, synergistic cost savings and improved sales in May legacy stores are not realized in a timely fashion, if disruption from the integration process diminishes comparable store sales growth, and/or if free cash flow is allocated to material share repurchases before repayment of acquisition related debt. Ratings could also be downgraded if it becomes unlikely that, by the end of fiscal 2007, credit metrics will reach fiscal 2004 levels using Moody's standard analytical adjustments; namely, debt to EBITDA (including one time charges) no greater than 2.7 times, free cash flow to debt of at least 15%, and EBIT to interest at 3.6 times or greater.

The rating outlook could stabilize if May is integrated on schedule, if new merchandise assortments boost comparable store sales in the legacy May stores, if post-acquisition financial policy targets debt reduction and if credit metrics reach pre-acquisition levels sooner than expected.

Ratings upgraded:

The May Department Stores Company (assumed by Federated Retail Holdings, Inc. and guaranteed by Federated Department Stores, Inc.):

Senior unsecured notes, debentures, bank agreement, MTN program and bonds, to Baa1 from Baa2

Senior unsecured shelf to (P)Baa1 from (P)Baa2

Associated Dry Goods (assumed by Federated Retail Holdings, Inc. and guaranteed by Federated Department Stores, Inc.):

Senior unsecured debentures to Baa1 from Baa2

Rating upgraded, and to be withdrawn:

May Department Stores Company

Issuer rating to Baa1 from Baa2

Rating confirmed, and to be withdrawn:

The May Department Stores Company:

Commercial paper at Prime-2

Rating Assigned:

Federated Retail Holdings, Inc., guaranteed by Federated Department Stores, Inc.

Commercial paper at Prime-2

Ratings Affirmed

Federated Department Stores, Inc. (assumed by Federated Retail Holdings, Inc. and guaranteed by Federated Department Stores, Inc.):

Senior unsecured notes, debentures, and bonds at Baa1

Senior unsecured shelf at (P)Baa1

Preferred stock shelf at (P)Baa3

Rating affirmed and to be withdrawn:

Federated Department Stores, Inc.:

Commercial paper at Prime-2

Headquartered in Cincinnati, Federated Department Stores, Inc. operates more than 950 department stores and more than 700 bridal and formalwear stores in 49 states, the District of Columbia, Guam and Puerto Rico. Banners include Macy's, Bloomingdale's, Marshall Field's, Lord & Taylor and Kaufmann's. The company also operates macys.com and Bloomingdale's By Mail.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Elaine E. Francolino
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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