August 18, 1995
To: Credit Agreement Lenders
Re: Request for Amendment #2 and Waiver
Please refer to the Credit Agreement dated as of December 19,
1994 (as heretofore amended, the "Credit Agreement") among
Federated Department Stores, Inc. ("Federated"), the Lenders
parties thereto, Citibank, N.A. as Administrative Agent, Chemical
Bank as Agent, Citicorp Securities, Inc. as Arranger and Chemical
Securities Inc. as Co-Arranger. Capitalized terms used in this
letter and not otherwise defined have the meanings assigned such
terms in the Credit Agreement. We remind you that the contents
of this letter are covered by the confidentiality requirements of
the above referenced Credit Agreement.
One component of Federated's growth strategy is to take advantage
of the consolidating nature of the industry by acquiring
department stores particularly in markets that could be folded
into existing Federated divisions. In furtherance of this growth
strategy, Federated has signed a merger agreement to acquire
Broadway Stores, Inc. ("Broadway"), which operates in California
and the Southwest. This acquisition is expected to provide sales
and earnings growth by enabling us to both enhance and protect
Macy's/Xxxxxxx'x current competitive positioning and also
facilitate the expansion of Bloomingdale's into California. In
so doing, we will be able to better leverage our costs in a
highly competitive market. Federated requires this Amendment #2
and Waiver from the Required Lenders in order to effect the
merger.
Summary of Key Financial Considerations
o Net purchase price after giving effect to anticipated asset
sales and repayment of certain assumed debt is approximately $990
million. (see Chart 3)
o Approximately 58% of the net purchase price is equity
financed, thereby minimizing the impact to total leverage.
o 45 new Federated Stores projected to generate EBITDA of $176
million in first full year of operation (1997).
o Up to $500 million in new financing will be required for:
i) Refinancing $143 million of Broadway's Convertible
Notes
ii) One time costs and initial conversion capital
expenditures
o This amendment requests changes to the Capital Expenditure,
Fixed Charge Coverage and Leverage Ratio financial covenants. No
change is required for the Interest Coverage covenant.
The changes in the Fixed Charge Coverage and Leverage Ratio are
required through the second quarter of 1997; they then revert
back to the current levels. these changes are primarily due to
the capital expenditures, and the associated one-time costs and
non-operating expenses, required to convert the stores and to
bring them up to the Federated standard.
OVERVIEW
Broadway operates 82 department stores in California and the
Southwest under the names Broadway, Emporium and Weinstocks.
While the Broadway currently operates below department store
standards for sales productivity and profitability, much of their
real estate is not only valuable but fits well with the needs of
our Macy's West operation. The Broadway store breakdown is shown
below.
Total 1994
Sq. Sales
Ft.
# Stores (000) (000)
Southern 41 7,105 $1,107
California .6
Northern 30 6,217 742.8
California
Southwest 11 1,751 243.0
Total 82 15,073 $2,093.4
While store specific decisions are not all final, we are assuming
for purposes of our analysis that we will retain 45 of the 82
Broadway store locations (the "Retained Stores") -- 41 for
Macy's/Xxxxxxx'x and 4 for Bloomingdale's as shown below.
This acquisition is important strategically to Federated in that
it will enable Xxxxxxx'x to significantly improve its Southern
California position which would be difficult to accomplish in any
other way. In addition, it will allow Bloomingdale's to enter
the California market with better locations faster and in a more
cost efficient manner than it could without the acquisition. It
will also enhance Macy's position in Northern California and the
Southwest.
Total
Retained Southern Northern Southwest
Calif. Calif.
Macy's/Xxxxxxx'x 41 23 11 7
Bloomingdale's 4 1 3 0
Total 45 24 14 7
OPERATING FORECAST
Our current plans include operating between closing and the end
of 1995 under the current Broadway nameplates and using our best
efforts to maximize the Christmas selling season. Starting early
in 1996 we will begin to convert stores to Macy's and Xxxxxxx'x
while most likely closing for remodeling the stores which are to
become Bloomingdale's. By November 1996 it would be our goal to
have converted most of the stores to be retained and to have sold
the remaining stores.
In fiscal 1997, the first full year of operations under the
revised structure, these 45 Retained Stores are projected to
produce $1,369 million in sales. The incremental EBITDA in 1997
is expected to be $176 million, growing to $257 million by 2000.
By 1997 the Debt to EBITDA ratio on a combined basis is expected
to be approximately 2.3x. This acquisition is expected to
produce an internal rate of return of 14%. We currently expect
there to be non-operating expense resulting from the capital
expenditures as well as the store conversions. All capital
expenditure projects include some non-operating expense, but
because of the conversions it is higher than normal in this
circumstance. (see Chart 1)
ONE-TIME COSTS
One-time costs are expected to be approximately $175 million over
1995 and 1996 to cover the shutdown of the central organization,
store closings, going dark periods during the Bloomingdale's
conversions, and transitional costs.
CAPITAL EXPENDITURES
We expect that it will require approximately $525MM of capital to
convert and remodel these Retained Stores. We expect to spend on
average $60 per gross square foot (estimated $75 per selling
square foot) for the Macy's and Xxxxxxx'x stores and $117 per
gross square foot (estimated $145 per selling square foot) for
the Bloomingdale's stores. Accordingly, the capital expenditure
covenant in the Credit Agreement will need to be increased to
cover this amount plus the portion of the purchase price
allocated to PP&E.
CLEAN-DOWN
In order to insure that Federated can fund these one-time costs,
conversion capital expenditures and non-operating expenses,
Federated is requesting an amendment of the Clean-Down provision
for this fiscal year. We are committing to a Clean-Down Amount
equal to the amount by which the Working Capital Commitments
exceed $650 million, or, in effect, the amount of cash borrowings
and stand-by letters of credit to be no more than $1,350 million
for the 30 day period.
FINANCING
(I) INITIAL PURCHASE
We are acquiring the common stock of Broadway with Federated
common stock valued at $375 million. We have agreed to a .27
to 1 conversion, which equates to 12.7 million shares of FD
stock. The Bank of America and other miscellaneous mortgage
debt and the GECC receivables facility are expected to remain
outstanding and are non-recourse to Federated. Federated
Noteholding Corporation II, a newly formed wholly owned
subsidiary of Federated ("FNC II"), will buy the Prudential
Mortgage Note for $200 million in equity and a new note of
$221.1 million, which note will have a subordinated guaranty
from Federated and will be secured by a pledge of the stock
of FNC II. The total value of equity being utilized for the
acquisition is therefore $575 million. The Convertible Note
has a change of control par put so that it is assumed that we
will need to refinance this at the time of the acquisition.
(see Charts 2, 3 and 4)
(II) REQUIRED FINANCING
Federated presently intends to finance the Convertible Note
refinancing ($143 million), the one time costs and conversion
capital expenditures primarily by issuing $300-500 million of
new senior unsecured notes. (see Chart 4)
WAIVER REQUEST
To consummate the transaction outlined above, we request a waiver
of, and each Lender, by its execution of a counterpart hereof
agrees to waive to the extent requested (subject to the
conditions of effectiveness referred to below), the following
sections of the Credit Agreement:
A. Section 5.01(l) of the Credit Agreement so that, due to
charter and Broadway Debt restrictions, (i) Merger Sub will
not be required to guaranty the obligations of Federated
under the Credit Agreement, (ii) Broadway will not be
required to guaranty the obligations of Federated under the
Credit Agreement so long as Broadway is restricted from
effecting such guaranty by the terms of the assumed debt at
Broadway, and (iii) the stock of FNC II will not have to be
pledged to the Lenders under the Credit Agreement since
Prudential required that it be pledged to them as security
for their new note;
B. Section 5.02(b)(i)(C) of the Credit Agreement so that,
notwithstanding the provisions thereof, which restrict
Federated's ability to issue unsecured Debt and require any
Net Cash Proceeds be applied to prepay Advances, Federated
can (i) issue up to $500 million of unsecured notes not
amortizing earlier than six months after the Termination Date
and (ii) apply the Net Cash Proceeds thereof to refinance the
Convertible Notes and to pay transaction costs, including the
one-time costs and conversion capital expenditures,
associated therewith;
C. Section 5.02(b)(iii) of the Credit Agreement to permit FNC II
to issue a new promissory note in an aggregate principal
amount not to exceed $221.5 million in exchange for the
existing Prudential Mortgage Note;
D. Section 5.02(c) of the Credit Agreement so that Nomo Company,
Inc., a newly formed wholly owned Subsidiary of Federated
("Merger Sub"), may merge with and into Broadway, with
Broadway being the surviving wholly owned subsidiary of
Federated;
E. Section 5.02(d) of the Credit Agreement to the extent it may
be deemed to restrict Federated's ability to sell the stores
bought as part of this acquisition so long as they are sold
for cash or promissory notes and for fair value in accordance
with the requirements of Section 5.02(d) of the Credit
Agreement and to pay down the Debt at Broadway as required by
the Debt at Broadway, provided that any Net Cash Proceeds
from such asset sales not required to repay outstanding Debt
of Broadway pursuant to the terms of the relevant Debt
instrument shall be applied to prepay the Advances in the
amount and in the order of priority set forth in Section 2.06
(b)(ii) of the Credit Agreement;
F. Section 5.02(e)(i) of the Credit Agreement to the extent it
may be deemed to restrict the ability of Federated to make an
equity infusion into Broadway to fund the refinancing of the
Convertible Notes and to fund the one time costs and
conversion capital;
G. Section 5.02(e)(xii) of the Credit Agreement solely to the
extent it restricts the making of the proposed acquisition,
including the acquisition of the common stock of Broadway,
the acquisition of the Prudential Note by FNC II and
assumption of the other Debt of Broadway as described herein;
H. Section 5.02(f) of the Credit Agreement to the extent that it
may be deemed to restrict the ability of (i) Broadway to issue
shares of its new Series A Preferred Stock upon the
consummation of the merger in exchange for the shares of its
existing Series A Preferred Stock and (ii) Federated to issue
warrants to the holders of Broadway's Series A Preferred Stock
entitling such holders to acquire shares of Federated's common
stock;
I. Section 5.02(j) of the Credit Agreement solely to the extent
necessary to permit Broadway to prepay the Convertible Notes
if such notes are put back to Broadway upon the change of
control.
J. Section 5.02(a) of the Credit Agreement solely to the extent
necessary to permit Federated to pledge the stock of FNC II to
secure Federated's obligations under its subordinated guaranty
in favor of Prudential.
K. Section 5.02(b) of the Credit Agreement solely to the extent
necessary to permit Federated to issue to Prudential its
subordinated guaranty of FNC II's obligations under FNC II's new
promissory note payable to Prudential.
AMENDMENTS
In addition to the foregoing accommodation, we request the
following amendments to the Credit Agreement:
A. Section 1.01 of the Credit Agreement be amended to restate in
their entirety the following two definitions:
"Clean-Down Amount" means (a) for the first Clean-Down
Period occurring after the date hereof, the amount by
which the aggregate amount of the Working Capital
Commitments on the first day of such Clean-Down Period
exceeds $650,000,000 and (b) for each Clean-Down Period
occurring thereafter, the amount by which the
aggregate amount of the Working Capital Commitments on
the first day of such Clean-Down Period exceeds
$1,000,000,000."
"Receivables Financing Facility" means the
receivables financing facility established by the
Borrower in 1992 and any replacement thereof that is
on terms no less favorable, taken as a whole, to the
Borrower and its Subsidiaries, pursuant to which
certain Subsidiaries of the Borrower issue non-
recourse public term Debt and commercial paper
secured by certain receivables of the Borrower and
its Subsidiaries, and the receivables financing
facility established by Broadway Receivables, Inc. as
of October 8, 1992 and the Subordinated Credit Card
Notes in the aggregate principal amount of $64
million issued by Broadway Receivables, Inc. pursuant
to an Indenture dated as of September 1, 1994 with
Bankers Trust Company, as trustee, together with any
replacement or replacements of either thereof
pursuant to which Broadway Receivables, Inc. finances
receivables it acquired from Broadway Stores, Inc."
B. Section 5.02(o), titled "Cash Capital Expenditures", of the
Credit Agreement be amended and restated so that it will read
in full as follows:
"During any Non-Investment Grade Period, make, or
permit any of its Subsidiaries to make, any Cash
Capital Expenditures that would cause the aggregate
of all such Cash Capital Expenditures made by the
Borrower and its Subsidiaries in any period set forth
below to exceed the amount set forth below for such
period:
Fiscal Year Amount
1995 $755,000,000
1996 $920,000,000
1997 $785,000,000
1998 and thereafter $800,000,000
provided that, commencing with the Fiscal Year ending
in January 1996, the Borrower and its Subsidiaries
shall be entitled to make additional Cash Capital
Expenditures in any Fiscal Year in an amount (the
"Carry-Over Amount") equal to the lesser of (i) 25%
of the amount set forth above for the immediately
preceding Fiscal Year and (ii) the amount by which
(A) the amount (the "Maximum Permitted Amount") of
Cash Capital Expenditures permitted under this
Section 5.02(o) for the immediately preceding Fiscal
Year (after giving effect to this proviso) exceeds
(B) the actual amount of Cash Capital Expenditures
made during the immediately preceding Fiscal Year;
provided further that if, subsequent to the making of
Cash Capital Expenditures during any Investment Grade
Period in excess of the amounts specified above, the
Debt Rating shall cease to be an Investment Grade
Rating, such Cash Capital Expenditures shall be
deemed to be permitted hereunder; provided still
further that in connection with the acquisition of
any business pursuant to an asset purchase (whether
during a Non-Investment Grade Period or an Investment
Grade Period), the applicable requirements as to
Investments contained in Section 5.02(e)(xii) shall
have been satisfied."
C. Sections 5.04 (a) and (b) of the Credit Agreement be amended
and restated so that they will read in full as follows:
(a)Leverage Ratio. Maintain at the end of each fiscal
quarter of the Borrower a Leverage Ratio of not more
than the amount set forth below for each period set
forth below:
Fiscal Quarter Ending
in the Fiscal Month of Ratio
April, 1995 0.55:1
July, 1995 0.55:1
October, 1995 0.56:1
January, 1996 0.53:1
April, 1996 0.53:1
July, 1996 0.53:1
October, 1996 0.55:1
January, 1997 0.49:1
April, 1997 0.48:1
July, 1997 0.48:1
October, 1997 0.49:1
January, 1998 0.44:1
April, 1998 0.44:1
July, 1998 0.44:1
October, 1998 0.45:1
January, 1999
and thereafter 0.40:1
(b)Fixed Charge Coverage Ratio. During each Non-Investment
Grade Period, maintain at the end of each Measurement
Period a ratio of the sum of (x) Consolidated EBITDA for
the Measurement Period then ended plus (y) in the case
of any such Measurement Period ending prior to or on
February 3, 1996, the net increase (if any) in respect
of Debt of the Borrower and its Subsidiaries under the
Receivables Financing Facility during such Measurement
Period to the sum of (i) Net Cash Interest for such
Measurement Period plus (ii) principal amounts of all
Funded Debt payable (other than (I) Debt refunded or
refinanced in accordance with the terms of the Loan
Documents and (II) Debt payable under the May Note
Monetization Facility) plus (iii) Cash Capital
Expenditures made plus (iv) cash income taxes paid plus
(v) cash dividends made, in each case by the Borrower
and its Subsidiaries during such Measurement Period
determined in accordance with GAAP of not less than the
amount set forth below for each period set forth below:
Measurement Period
Ending in the Fiscal Ratio
Month of
April, 1995 0.25:1
July, 1995 0.32:1
October, 1995 0.50:1
January, 1996 1.00:1
April, 1996 1.00:1
July, 1996 0.90:1
October, 1996 0.87:1
January, 1997 0.93:1
April, 1997 0.95:1
July, 1997 0.98:1
October, 1997 1.00:1
January, 1998
and thereafter 1.00:1
Confirmations
By its execution of this Amendment #2 and Waiver letter, the
Borrower represents and warrants that: (i) the representations
and warranties contained in each Loan Document are correct on and
as of the date hereof other than any such representations or
warranties that, by their terms, refer to a specific date other
than the date hereof, and (ii) no event has occurred and is
continuing that constitutes a Default.
Miscellaneous
This Amendment #2 and Waiver letter shall become effective as of
the date first above written when, and only when, the
Administrative Agent shall have received counterparts of this
Amendment #2 and Waiver letter executed by the undersigned and
the Required Lenders or, as to any of the Lenders, advice
satisfactory to the Administrative Agent that such Lender has
executed this Amendment #2 and Waiver letter, and the consent
attached hereto executed by each Guarantor, provided, however,
that if the transactions described in this Amendment #2 and
Waiver letter fail to occur by February 29, 1996, this Amendment
#2 and Waiver letter shall be null and void and of no force and
effect and the provisions of the Credit Agreement shall be deemed
not to have been amended or waived pursuant to this Amendment #2
and Waiver letter in any respect. The effectiveness of this
Amendment #2 and Waiver letter is conditioned upon the
substantial accuracy of the factual matters described herein.
This Amendment #2 and Waiver letter is subject to the provisions
of Section 8.01 of the Credit Agreement. Except as specifically
provided herein, the Credit Agreement shall remain in full force
and effect and is hereby ratified and confirmed. Notwithstanding
anything in this Amendment #2 and Waiver letter to the contrary,
no waiver of any default under or breach of any provision of the
Credit Agreement shall be deemed to be a waiver of any subsequent
similar or different default under or breach of such or any other
provision of the Credit Agreement or of any election of remedies
available in connection with any of the foregoing.
On and after the effectiveness of this Amendment #2 and Waiver
letter, each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof" or words of like import
referring to the Credit Agreement, and each reference in the
Notes and each of the other Loan Documents to "the Credit
Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement, shall mean and be a reference
to the Credit Agreement, as amended by this Amendment #2 and
Waiver letter.
This Amendment #2 and Waiver letter may be executed in any number
of counterparts and by different parties hereto in separate
counterparts, each of which when executed and delivered shall be
deemed to be an original and all of which taken together shall
constitute but one and the same Amendment #2 and Waiver letter.
Delivery of an executed counterpart of a signature page to this
Amendment #2 and Waiver letter by telecopier shall be effective
as delivery of a manually executed counterpart of this Amendment
#2 and Waiver letter.
This Amendment #2 and Waiver letter shall be governed by, and
construed in accordance with, the laws of the State of New York.
If the terms of this Amendment #2 and Waiver letter are
acceptable to you, please return an executed copy of this
Amendment #2 and Waiver letter by August 30, 1995 via facsimile
to Xx. Xxxxxxxx Xxxx at Citibank, N.A. fax number (000) 000-0000.
Very truly yours,
FEDERATED DEPARTMENT STORES, INC.
By: \s\ Xxxxxx X. Xxxxx
Xxxxxx X. Xxxxx
Vice Chairman and Chief
Financial Officer
Accepted and Agreed to on
this 30 day of August, 1995
Name of Bank: Citibank
BY: \s\ Xxxxxx Xxxxxxx
Name: Xxxxxx Xxxxxxx
Title: Assistant Vice President
CONSENT
Dated as of August 18,
1995
Each of the undersigned as a Guarantor under the Guaranty dated
December 19, 1994 (the "Guaranty") in favor of the Administrative
Agent, the Agent, the Lender Parties parties to the Credit
Agreement referred to in the foregoing Amendment #2 and Waiver
letter and the Hedge Banks referred to in the Credit Agreement
and Federated Retail Holdings, Inc., as a Pledgor under the
Security Agreement dated December 19, 1994 (the "Security
Agreement") in favor of the Administrative Agent, for its benefit
and the benefit of the Secured Parties referred to therein,
hereby consents to such Amendment #2 and Waiver letter and hereby
confirms and agrees that (a) notwithstanding the effectiveness of
such Amendment #2 and Waiver letter, each of the Guaranty and the
Security Agreement is, and shall continue to be, in full force
and effect and is hereby ratified and confirmed in all respects,
except that, on and after the effectiveness of such Amendment #2
and Waiver letter, each reference in each of the Guaranty and the
Security Agreement to the "Credit Agreement", "thereunder",
"thereof" or words of like import shall mean and be a reference
to the Credit Agreement, as amended by such Amendment #2 and
Waiver letter, and (b) the Collateral Documents to which such
Pledgor is a party and all of the Collateral described therein
do, and shall continue to, secure the payment of all the Secured
Obligations (in each case, as defined therein).
Xxxxxxx & Xxxxxx, Inc.
Bloomingdale's, Inc.
Bloomingdale's By Mail Ltd.
The Bon, Inc.
Xxxxxxx'x, Inc.
Burdines, Inc.
Federated Real Estate, Inc.
Federated Retail Holdings, Inc.
Xxxxxx Xxxxx Stores Corporation
Lazarus, Inc.
Lazarus PA, Inc.
Macy's Close-Out, Inc.
Macy's East, Inc.
Macy's Real Estate, Inc.
Macy's Specialty Stores, Inc.
Macy's West, Inc.
Rich's Department Stores, Inc.
Xxxxx'x Department Stores, Inc.
By: \s\ Xxxxxx X. Xxxxxxxxx
Title: Vice President
