DBRS Assigns Ratings to Federated Retail Holdings, Inc.

Dominion Bond Rating Service (“DBRS”) has assigned a rating of R-2 (middle) to the Commercial Paper and BBB to the Senior Unsecured Debt of Federated Retail Holdings, Inc., the wholly owned operating subsidiary of Federated Department Stores, Inc. (“Federated” or the “Company”). The trends are Stable.

The rating reflects the increased leverage resulting from the recently completed merger with May Department Stores (“May”). The increased leverage has the following two components: (1) the existing balance sheet debt of May, which was more highly levered than Federated; and (2) US$1.88 billion remaining of an original US$4.58 billion bridge facility, which was used to finance the transaction. The remainder of this bridge facility is expected to be retired from asset sales within 12 months. The rating also reflects the steady positive trend in earnings and cash flow in Federated’s operations, as well as the increasing geographic diversification of the Company resulting from the acquisition. In addition, the rating reflects the challenges of integrating May’s operations and achieving financial results from those operations that are consistent with Federated’s historical results.

Federated has established a national upscale department store chain with operations in most key U.S. markets Geographic diversification provides a degree of protection from regional economic challenges. Federated’s primary banners, Macy’s and Bloomingdale’s, are among the strongest and best-known names in retailing. The merger with May also provides increased opportunity to use national promotions and advertising, increased ability to develop and promote private label products, and increasing clout with suppliers.

Notwithstanding these strengths, Federated faces the following key challenges: (1) Consumer tastes change rapidly and a fashion-oriented retailer must remain near the forefront of style trends. (2) The department store business is highly competitive, with strong competition from other department stores as well as specialty retailers, category killers, and big-box retailers. (3) Merger integration risk is significant. The combined Federated/May will be almost twice the size of the previous business and will include operations in many geographic areas not previously serviced by Federated. (4) Sales in the department store channel are essentially flat. As such, profitability growth is primarily derived from cost reductions and operational efficiencies.

The financial profile should improve in the near term through the continued reduction of the bridge facility and continue to improve modestly thereafter on growing operating cash flow and moderate debt reduction.